<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-23698
APPLIED DIGITAL ACCESS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 68-0132939
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
9855 SCRANTON ROAD, SAN DIEGO, CALIFORNIA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
(619) 623-2200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
There were 12,236,383 shares of the registrant's Common Stock, no par value,
outstanding on October 31,1996.
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APPLIED DIGITAL ACCESS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for
the three and nine months ended September 30, 1996
and September 30, 1995 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 1996 and
September 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
Risks and Uncertainties 11-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
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Item 1. Page 3
APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,359 $ 1,673
Investments - current 19,030 25,079
Accounts receivable, net 5,872 5,358
Inventory, net 7,449 6,572
Deferred income taxes 750 750
Prepaid expenses and other current assets 1,051 1,296
-------- --------
Total current assets 36,511 40,728
Investments - non-current 1,999 5,095
Property and equipment, net 4,684 3,361
Deferred income taxes 752 752
Other, net 3,056 --
-------- --------
$ 47,002 $ 49,936
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,203 $ 1,820
Accrued expenses 1,490 843
Accrued warranty 1,388 1,305
Current portion of obligations under capital leases 18 32
-------- --------
Total current liabilities 5,099 4,000
Obligations under capital leases, net of current portion 37 49
-------- --------
Total liabilities 5,136 4,049
-------- --------
Shareholders' equity:
Preferred stock, no par value, 7,500,000 shares authorized,
no shares issued -- --
Common stock, no par value, 30,000,000 shares authorized,
12,231,682 and 11,899,216 shares issued and outstanding at
September 30, 1996 and December 31, 1995, respectively 50,564 49,000
Additional paid-in capital 2,421 2,391
Unrealized gain on investments 5 147
Accumulated deficit (11,124) (5,651)
-------- --------
Total shareholders' equity 41,866 45,887
-------- --------
$ 47,002 $ 49,936
-------- --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
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APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands (Amounts in thousands
except per share data) except per share data)
<S> <C> <C> <C> <C>
Revenue $ 6,957 $ 2,016 $ 18,110 $ 14,872
Cost of revenue 3,807 1,162 8,874 6,032
-------- -------- -------- --------
Gross profit 3,150 854 9,236 8,840
Operating expenses:
Research and development 1,816 1,512 5,388 4,158
In-process research and development
related to asset acquisition 2,100 -- 3,286 --
Sales and marketing 1,631 985 4,832 2,995
General and administrative 983 1,133 2,413 2,462
-------- -------- -------- --------
Total operating expenses 6,530 3,630 15,919 9,615
-------- -------- -------- --------
Operating loss (3,380) (2,776) (6,683) (775)
Interest income 384 507 1,337 1,532
Other income (expense), net 4 2 46 1
-------- -------- -------- --------
Income (loss) before income taxes (2,992) (2,267) (5,300) 758
Provision (benefit) for income taxes 173 (793) 173 266
-------- -------- -------- --------
Net income (loss) ($ 3,165) ($ 1,474) ($ 5,473) $ 492
======== ======== ======== ========
Net income (loss) per share ($ 0.26) ($ 0.12) ($ 0.45) $ 0.04
======== ======== ======== ========
Number of shares used in per share
computations 12,175 11,854 12,033 12,826
</TABLE>
The accompanying notes are an integral part of the financial statements.
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APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 5,473) $ 492
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
In-process research and development related to asset acquisitions 3,286 --
Depreciation and amortization 1,192 637
Other 38 37
Changes in assets and liabilities:
Accounts receivable (514) (786)
Inventory (877) (2,838)
Prepaid expenses and other current assets 245 (80)
Accounts payable 383 (151)
Accrued expenses 639 (494)
Accrued warranty 83 (51)
Net cash used by operating activities (998) (3,234)
Cash flows from investing activities:
Purchases of investments (16,016) (26,904)
Maturities of investments 24,979 29,752
Purchases of property and equipment (1,372) (1,359)
Purchase costs related to asset acquisitions (6,356) --
Net cash provided by investing activities 1,235 1,489
Cash flows from financing activities:
Principal payments on capital leases (26) (112)
Proceeds from the issuance of common
stock under stock option plans 475 595
Net cash provided by financing activities 449 483
Net increase (decrease) in cash and cash equivalents 686 (1,262)
Cash and cash equivalents, beginning of period 1,673 2,680
Cash and cash equivalents, end of period $ 2,359 $ 1,418
</TABLE>
The accompanying notes are an integral part of the financial statements.
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APPLIED DIGITAL ACCESS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1996
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Applied Digital Access, Inc. ("the Company") and
its wholly owned subsidiary, Applied Digital Access - Canada, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation. These financial statements have been prepared in accordance
with the interim reporting requirements of Form 10-Q, pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods
ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996. These financial
statements should be read in conjunction with the Company's audited
financial statements and notes thereto, together with Management's
Discussion and Analysis of Financial Condition and Results of Operations,
and Risks and Uncertainties, contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 filed with the SEC.
2. Inventory
Inventory is valued at the lower of cost (determined using the first-in,
first-out method) or market. Inventory was as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(Dollars in thousands)
<S> <C> <C>
Raw materials $4,561 $3,483
Work-in-process 2,248 2,314
Finished goods 1,109 1,313
----- ------
7,918 7,110
Less inventory reserve (469) (538)
-------- --------
$7,449 $6,572
====== ======
</TABLE>
3. Per Share Information
Per share information is computed using the weighted average number of
common shares and common equivalent shares (when the effect is dilutive)
outstanding during the periods presented. Common equivalent shares result
from outstanding options and warrants to purchase common stock.
4. Acquisitions
On July 16, 1996, the Company acquired certain assets of MPR Teltech, a
subsidiary of BC TELECOM, Inc. The assets acquired were part of MPR
Teltech's operating unit commonly known as the Special Services Network
division ("SSN"). The Company and its Canadian subsidiary, Applied Digital
Access - Canada, Inc. ("ADA-Canada"), acquired the assets for $4.2 million
in cash and 150,000 shares of the Company's common stock, and incurred
approximately $.2 million in related costs. SSN was an operations systems
software development group with expertise in development of network
management systems for public carriers. SSN developed operations systems
software primarily for Northern Telecom ("Nortel"). SSN has become part of
ADA-Canada and will develop network performance management operations
systems software products for the Company and its customers, including
Nortel. The transaction, which was accounted for as a purchase, included
the acquisition of in-process research and development valued at
approximately $2.1 million; property
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and equipment valued at approximately $.9 million; and goodwill and know
how valued at approximately $2.6 million. The Company recorded a one-time
charge in the third quarter of 1996 for the $2.1 million associated with
purchased research and development costs.
On February 29, 1996, the Company acquired certain assets of Applied
Computing Devices, Inc. ("ACD"), a company that developed and marketed
operations systems ("OS") software used primarily by independent telephone
companies to manage certain functions in their networks. The customer set
and products of ACD complement those of ADA and ADA intends to continue to
market and enhance these products. The Company acquired the assets for
$1.7 million in cash and incurred approximately $.2 million in related
costs. The assets were acquired at an auction held in Federal Bankruptcy
Court, Southern District of Indiana. The transaction, which was accounted
for as a purchase, included the acquisition of in-process research and
development valued at approximately $1.2 million; property and equipment
valued at approximately $.4 million; and purchased technology valued at
approximately $.3 million. The Company recorded a one-time charge in the
first quarter of 1996 for the $1.2 million associated with purchased
research and development costs.
The following condensed pro forma results of operations information has
been presented to give effect to the purchases as if such transactions had
occurred at the beginning of each of the periods presented. The
historical results of operations have been adjusted to reflect additional
depreciation and amortization expense based upon the value allocated to
assets acquired in the purchases. The pro forma results of operations
information is presented for informational purposes only and is not
necessarily indicative of the operating results that would have occurred
had the acquisitions been consummated as of the beginning of the periods
presented, nor is it necessarily indicative of future operating results.
CONDENSED PRO FORMA RESULTS OF OPERATIONS
(amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Nine months Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Revenue $ 23,348 $ 27,962
Net income (loss) (5,827) (5,351)
Net income (loss) per share ($ 0.48) ($ 0.45)
Weighted average shares used
in computation 12,140 11,930
</TABLE>
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Item 2.
APPLIED DIGITAL ACCESS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1996
Except for the historical information contained herein, the matters discussed in
this Form 10-Q may consist of forward-looking statements which involve risk and
uncertainties. Factors that may affect the Company's results of operations
include but are not limited to customer delays in reengineering programs,
capital spending constraints at several of the Company's customers, the impact
of reorganizations, restructurings and reductions-in-force at several of the
Company's Regional Bell Operating Company ("RBOC") customers; deregulation of
the telecommunications industry; and the delay in the receipt of the FCC's
informal assessment on the Company's Remote Module product, received in
September 1995 following introduction of the product in March 1995. The Company
believes that deregulation and the resulting increased number of competitors
providing telecommunications services could result in an expansion of the
Company's customer base and increased competition with regard to service levels
and costs, ultimately causing an increased demand for the Company's products.
However, additional delays in the deployment of the Company's products and
continued uncertainty surrounding the telecommunications industry may have a
material adverse impact on the Company's business, operating results and
financial condition. As a result of the uncertainties faced by the Company's
customers, the Company continues to have limited visibility with regard to
future customer orders and the timing of such orders. Customers have been
placing orders quarterly and the Company has been operating in a book and ship
mode. With a small customer base and fluctuating order size, this trend has
resulted in quarter-to-quarter revenue fluctuations that are likely to continue
for the foreseeable future. While the outlook contained in any forward-looking
statements represents management's current judgment on the future direction of
the business, the risks and uncertainties discussed herein could cause actual
results to differ materially from any future performance suggested herein. The
Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or
circumstances arising after the date hereof.
The following should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Risks and
Uncertainties", contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 filed with the Securities and Exchange
Commission.
Overview
In October 1996, the U.S. Patent and Trademark Office granted the Company a
patent for technology used in the Company's Remote Module product, a unique DS1
Network Interface Unit ("NIU"). The Remote Module, when used with the Company's
T3AS Performance Monitoring and Test System, and Sectionalizer Operations
Systems ("OS") software is intended to provide a full end-to-end network
performance management capability.
On July 16, 1996, the Company acquired certain assets of MPR Teltech, a
subsidiary of BC TELECOM, Inc. The assets acquired were part of MPR Teltech's
operating unit commonly known as SSN. The Company and its Canadian subsidiary,
ADA-Canada, acquired the assets for $4.2 million in cash and 150,000 shares of
the Company's common stock. SSN is an operations systems software development
group with expertise in development of network management systems for public
carriers. SSN developed operations systems ("OS") software primarily for Nortel.
SSN has become part of ADA-Canada and will develop network performance
management OS software products for the Company and its customers, including
Nortel. The Company incurred a $2.1 million one-time charge in the third quarter
for purchased research and development related to the asset acquisition.
On February 29, 1996, the Company acquired certain assets of ACD, a company that
developed and marketed OS software used primarily by independent telephone
companies to manage certain functions in their networks. The customer set and
products of ACD complement those of ADA, and ADA has continued to market and
enhance these products. The Company acquired the assets for $1.7 million in cash
and incurred approximately $.2 million in related costs. The assets were
acquired at an auction held in Federal Bankruptcy Court, Southern District of
Indiana. Since filing for bankruptcy in September 1995, ACD had not generated
significant revenue. The Company recorded a one-time charge of approximately
$1.2 million associated with purchased research and development in the first
quarter of 1996 as a result of the acquisition.
In February 1996, the settlement of a class action lawsuit filed against the
Company and two of its officers in March 1995 was finalized and received court
approval. The settlement had previously been announced in December 1995. The
litigation was settled for approximately $1.5 million, of which the Company was
obligated to pay approximately $.4 million with the remainder paid by the
Company's directors' and officers' liability insurance carrier. Charges
associated with the suit were accrued in 1995.
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Results of Operations
Revenue totaled $6,957,000 for the three months ended September 30, 1996, a 245%
increase from revenue of $2,016,000 for the three months ended September 30,
1995. The increase is primarily the result of revenue generated from network
management OS software design services and products acquired through this year's
acquisitions, as well as an increase in sales of the Company's T3AS products
compared to the same period in the prior year. Revenue totaled $18,110,000 for
the nine months ended September 30, 1996, a 22% increase from revenue of
$14,872,000 in the same period last year. This increase resulted from revenue
generated by OS services and products acquired through this year's acquisitions.
Revenue for the quarter ended September 30, 1996 included approximately $4.3
million from the sale of the Company's T3AS products and services and $2.7
million from OS services and products compared to approximately $2.0 million and
$0 in the same period of 1995. Revenue for the nine months ended September 30,
1996 included approximately $14.6 million from the sale of the Company's T3AS
products and services and $3.5 million from OS services and products compared to
approximately $14.9 million and $0 for the same period in 1995. The Company
intends to continue to market and develop OS products and services but is
uncertain as to the future level of business related to these products. The
majority of the Company's revenue to date has been derived from the sale of T3AS
products. The Company expects that revenue from sales of T3AS products will
continue to account for the majority of the Company's revenue for the
foreseeable future.
Gross profit was $3,150,000 for the three months ended September 30, 1996, an
increase of 269% from $854,000 in the third quarter of 1995. Gross profit as a
percent of revenue was 45% for the three months ended September 30, 1996
compared to 42% for the three months ended September 30, 1995. The increases in
gross profit and gross profit as a percent of revenue were primarily the result
of increased revenue. Gross profit totaled $9,236,000 for the nine months ended
September 30, 1996, a 4% increase from $8,840,000 in the same period of 1995.
Gross profit as a percent of revenue was 51% for the nine months ended September
30, 1996 compared to 59% for the same period last year. The decrease in gross
profit as a percent of revenue resulted primarily from a product mix weighted
toward lower margin T3AS products and services and lower-margin revenue from
network management OS software design services. In the quarter ended September
30, 1996, the majority of the Company's Canadian subsidiary operations supported
network management OS software design services. Since the cost of design
services revenue includes both direct and indirect costs of supplying the
services, the majority of the Canadian subsidiary's operating costs are included
in cost of revenue. There can be no assurance that the Company will be able to
maintain current gross profit or gross profit as a percent of revenue levels. In
1995, the Company implemented price reductions on certain components of the
Company's T3AS base system to reduce the cost of initial system deployments in
new sites, particularly in low-circuit-density applications of DS1 circuit
applications. Future product mix weighted toward price-reduced components may
have a negative impact on gross profit. There can be no assurance that past or
future price reductions will result in increased orders for the Company's
products. In addition to the factors discussed above, other factors which may
materially and adversely affect the Company's gross profit in the future include
its level of revenue, competitive pricing pressures in the telecommunication
network management market, new product introductions by the Company or its
competitors, potential inventory obsolescence and scrap, possible recalls,
production or quality problems, timing of development expenditures, changes in
material costs, disruptions in sources of supply, regulatory changes, seasonal
patterns of bookings, capital spending, and changes in general economic
conditions.
Research and development expenses totaled $1,816,000 for the three months ended
September 30, 1996, a 20% increase from $1,512,000 for the three months ended
September 30, 1995. Research and development expenses totaled $5,388,000 for the
nine months ended September 30, 1996, a 30% increase from $4,158,000 for the
same period last year. The increases were primarily due to the additions of
research and development personnel as a result of the ACD asset acquisition,
increases in depreciation and maintenance expenses, and increases in
non-recurring engineering (NRE) expenses due to timing of planned development
projects compared to the same periods last year. Research and development
personnel expenses for the three and nine month periods ended September 30, 1996
increased 22% and 30%, respectively, compared to the same periods in the prior
year. Of these percentage increases, approximately nineteen points and fourteen
points, respectively, are attributable to the addition of research and
development personnel related to the ACD asset acquisition. The Company believes
that its future success depends on its ability to maintain its technological
leadership through enhancement of its existing products and development of
innovative new products and services that meet customer needs. Therefore, the
Company intends to continue to make significant investments in research and
product development in association with planned development projects.
In the three months ended September 30, 1996, the Company recorded a $2.1
million one-time charge for purchased research and development costs related to
the SSN asset acquisition and in the first quarter of 1996, the Company recorded
a one-time charge of approximately $1.2 million for purchased research and
development costs related to the ACD asset acquisition.
Sales and marketing expenses were $1,631,000 for the three months ended
September 30, 1996 , a 66% increase from $985,000 for the three months ended
September 30, 1995. Sales and marketing expenses totaled $4,832,000 for the nine
months ended
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September 30, 1996, a 61% increase from $2,995,000 for the nine months ended
September 30, 1995. The increases were primarily the result of the addition of
technical customer support personnel, the addition of customer support and
marketing personnel related to the ACD asset acquisition, and increased
promotional expenses. The Company expects that sales and marketing expenses
will continue to increase in absolute dollars as the Company continues to hire
additional sales, marketing and technical support personnel to support planned
product introductions.
General and administrative expenses totaled $983,000 for the three months ended
September 30, 1996, a 13% decrease from $1,133,000 for the three months ended
September 30, 1995. This decrease is primarily due to lower legal expenses in
this year's third quarter compared to last year as a result of lawsuit
settlement fees booked in last year's third quarter, offset by increased
expenses related to the amortization of goodwill and intangibles related to the
SSN asset acquisition. General and administrative expenses totaled $2,413,000
for the nine months ended September 30, 1996, a decrease of 2% from $2,462,000
for the nine months ended September 30, 1995. This decrease is the net result of
lower legal expenses this year compared to last year for the same reasons
discussed above, offset by increased expenses for goodwill amortization,
increased consulting expenses related to the Company's recruiting efforts for
additional personnel and increased administrative support. The Company expects
that general and administrative expenses will increase in absolute dollars as
the administrative support needs of the Company increase.
Interest income totaled $384,000 for the third quarter of 1996, a 24% decrease
from $507,000 in the same quarter a year ago. Interest income totaled $1,337,000
for the nine months ended September 30, 1996, a 13% decrease from $1,532,000 in
the same period last year. The decreases are primarily the result of a decrease
in cash investments compared to the same periods last year.
For the nine months ended September 30, 1996, the Company provided for income
taxes related to the operations of the Company's Canadian subsidiary, based on
applicable Canadian statutory rates. The Company did not provide for U.S. income
taxes for the nine months ended September 30, 1996 due to an operating loss,
compared to an effective rate of 35% for the nine months ended September 30,
1995. The Company expects to provide for foreign, federal and state income taxes
for 1996 at applicable statutory rates, after giving effect to net operating
losses, remaining available net operating loss carryforwards and any available
tax credits.
As a result of the factors discussed above, the Company incurred a net loss of
$3,165,000, or $.26 per share, for the three months ended September 30, 1996
compared to a net loss of $1,474,000, or $.12 per share for the three months
ended September 30, 1995. Excluding the $2.1 million one-time charge for
purchased research and development associated with the acquisition of SSN
assets, the Company would have recorded a net loss of $1,065,000, or $.09 per
share, for the three months ended September 30, 1996. The Company incurred a net
loss of $5,473,000, or $.45 per share, for the nine months ended September 30,
1996 compared to net income of $492,000, or $.04 per share for the nine months
ended September 30, 1995. Excluding the $2.1 million one-time charge associated
with the acquisition of SSN assets and the $1.2 million one-time charge
associated with the acquisition of ACD assets, the Company would have recorded a
net loss of $2,187,000, or $.18 per share, for the nine months ended September
30, 1996.
Liquidity and Capital Resources
At September 30, 1996, the Company had approximately $23,388,000 in cash and
investments, compared to $31,847,000 at December 31, 1995. The decrease in cash
and investments is primarily due to cash payments related to the SSN and ACD
asset acquisitions.
Working capital decreased approximately 14% from $36,728,000 at December 31,
1995 to $31,412,000 at September 30, 1996. The decrease in working capital was
primarily the result of the SSN and ACD asset acquisitions, an increase in
accounts payable and an increased inventory level.
For the nine months ended September 30, 1996, the Company's operating activities
used $998,000 in cash primarily as a result of an operating loss compared to
the use of $3,234,000 by operating activities for the nine months ended
September 30, 1995.
For the nine months ended September 30, 1996, cash used for the ACD and SSN
asset acquisitions and related acquisition costs totaled $1,900,000 and
$4,456,000, respectively. The majority of tangible assets acquired in the ACD
and SSN acquisitions consisted of computer equipment. Cash used for capital
expenditures totaled approximately $1,372,000 for the nine months ended
September 30, 1996 compared to $1,359,000 for the nine months ended September
30, 1995. Most of the capital equipment additions were for the purchase of
computer and lab equipment to support the Company's expanded research and
development efforts. The Company expects the level of capital expenditures will
increase in 1996 as a result of planned
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facility moves in Terre Haute, Indiana and Vancouver, British Columbia, Canada,
planned development projects and increased personnel levels.
Assuming no material changes in the Company's current operating plans, the
Company believes that cash generated from operations and the total of its cash
and investments, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next twelve months. Significant
additional capital resources, however, may be required to fund acquisitions of
complementary businesses, products or technologies. Alternatively, the Company
may need to issue additional shares of its capital stock or incur indebtedness
in connection with any such acquisitions. At present, the Company does not have
any agreements or commitments with respect to any such acquisition.
The Company believes the impact of inflation on its business activities has not
been significant to date.
RISKS AND UNCERTAINTIES
Concentration of Major Customers; Telephone Company Qualification
Requirements. The market for telephone network test and performance monitoring
systems consists primarily of telephone companies, including the seven RBOCs,
other local telephone companies and long distance telephone companies. The
Company's marketing efforts have focused on the RBOCs. Accordingly, at present
the Company's customer base is highly concentrated and there can be no assurance
that its customer base will become less concentrated. Further, the Company's
customers are significantly larger than the Company and may be able to exert a
high degree of influence over the Company. The loss of one or more of the
Company's major customers, the reduction of orders, or a delay in deployment of
the Company's products could materially and adversely affect the Company's
business, operating results and financial condition. Prior to selling products
to a telephone company, a vendor must first undergo a product qualification
process for its products with the telephone company. Although the qualification
process for a new product varies somewhat among these prospective customers, the
Company's experience is that the process often takes a year or more. Currently,
six of the seven RBOCs have qualified and deployed the Company's T3AS products.
Further, any failure on the part of any of the RBOCs or other telephone
companies to maintain their qualification of the Company's T3AS products,
failure of any of the RBOCs or other telephone companies to deploy the Company's
T3AS products, or any attempt by any of the RBOCs or other telephone companies
to seek out alternative suppliers could have a material adverse effect on the
Company's business, operating results and financial condition. BellSouth,
Ameritech, Southwestern Bell and U S West have entered into purchase contracts
with the Company. Other RBOCs, independent telephone companies, and other
telephone service providers purchase the Company's T3AS products under standard
purchase orders. Since the RBOC contracts may be terminated at the convenience
of the RBOC, the Company believes that the purchase contracts are not materially
different than purchasing under purchase orders. There can be no assurance that
the Company's T3AS products will be qualified by new customers, or that such
qualification will not be significantly delayed. Furthermore, telephone company
work force reductions and staff reassignments have in the past delayed the
product qualification process, and the Company expects such reductions and
reassignments to continue in the future. There can be no assurance that such
reductions and reassignments will not have a material adverse effect on the
Company's business, operating results and financial condition. Additionally,
the majority of the Company's OS design service business is currently
concentrated with one major customer. This customer has the ability to
terminate the arrangement immediately so long as the customer pays the Company
the amounts forecast for a certain period following such termination and
certain wind-down costs associated with the termination of the arrangement. Any
such termination could have a material and adverse effect on the Company's
business, results of operations and financial condition.
High Dependence on Single Product Line. The majority of the Company's
revenue to date has been derived from the sale of T3AS products and services and
the Company expects that this will continue for the foreseeable future. Failure
by the Company to enhance its existing T3AS products and to develop new product
lines and new markets could materially and adversely affect the Company's
business, operating results and financial condition. There is no assurance that
the Company will be able to develop and market new products and technology or
otherwise diversify its source of revenue.
Competition. The Company believes the principal competitive factors in
its markets are conformance with Bellcore and other industry transmission
standards and specifications; product features, including price, performance
and reliability; technical support; and the maintenance of close working
relationships with customers. While the Company believes it has competed
favorably to date with respect to each of these factors, there can be no
assurance that the Company will compete successfully in the future with respect
to these factors and others that may arise.
The Company believes there are currently no competitors that provide an
integrated comprehensive solution to performance monitoring and testing of the
DS3 circuit as does the Company's T3AS system. Although the Company believes
that there are fewer than 10 current competitors that provide partial solutions
to either performance monitoring or testing of the DS1 or DSO circuits that
make up the DS3 circuit, this market is extremely competitive.
In each of the Network Interface Unit, Centralized Test System and OS
markets, although there are currently a limited number of competitors, each of
these markets is fiercely competitive. In each of these markets, the Company
expects the competition to increase significantly in the future. For instance,
in the OS market, improved technologies and tool sets have made the barriers to
entry in this market relatively small.
Such current and future competitors have significantly greater
technical, financial, manufacturing and marketing resources than the Company,
and several of them have long-established relationships with the Company's
current and prospective customers. In addition, product price reductions
resulting from market share penetration initiatives or competitive pricing
pressures could have a material and adverse effect on the Company's business,
operating results, and financial condition. There can be no assurance that the
Company will have the financial resources, technical expertise or manufacturing,
marketing, distribution and support capabilities to compete successfully in
the future.
Management of Changing Business. In February 1996, the Company acquired
certain assets of ACD and in July 1996, the Company acquired certain assets of
the SSN division of MPR Teltech. As a result of these acquisitions, the Company
obtained additional office space and hired additional personnel in both Indiana
and British Columbia, Canada to support the business operations of the new
products, services and technologies acquired. The majority of the Company's
Canadian subsidiary's operations is currently concentrated on OS design
services. The Company has explored transitioning portions of the design service
business to a product-oriented business. Any such transition would likely place
a significant strain on the Company's management, information systems and
operations and there can be no assurance that such transition could be
successfully managed. In addition, over the past three years, the Company has
experienced significant growth in its infrastructure as the Company seeks to
expand its business. Such growth has placed, and is expected to continue to
place, a significant strain on the Company's management, information systems and
operations. The strain experienced to date has chiefly been in hiring sufficient
numbers of qualified personnel to support the expansion of the business. The
Company is not able to forecast additional strains that may be placed on the
Company's management, information systems and operations as a result of either
the ACD and SSN asset acquisitions or in the future in the event that growth
continues. The Company's potential inability to manage its changing business
effectively could have a material adverse effect on the Company's business,
results of operations and financial condition.
Rapid Technological Change and Dependence on New Products. The market
for the Company's products is characterized by rapid technological advances,
evolving industry transmission standards, changes in customer requirements, and
frequent new product introductions and enhancements. The introduction of
telephone network test and performance-monitoring products involving superior
technologies or the evolution of alternative technologies or new industry
transmission standards could render the Company's existing products, as well as
products currently under development, obsolete and unmarketable. The Company
believes its future success will depend in part upon its ability, on a
cost-effective and timely basis, to continue to enhance T3AS products, to
develop and introduce new products for the telephone network test and
performance-monitoring market and other markets, to address new industry
transmission standards and changing customer needs, and to achieve broad market
acceptance for its products. In particular, the Company anticipates that the
SONET and SDH optical transmission standards will become the industry
transmission standards over the coming years for the North American and
international networks, respectively. The Company's current T3AS products do not
address either the SONET or SDH transmission standard. The Company intends to
extend its current products and develop new products to accommodate such new
transmission standards, as they evolve. The widespread adoption of SONET and/or
SDH as industry transmission standards before the Company is able to
successfully develop a product which addresses such transmission standards could
adversely affect the sale and deployment of the Company's T3AS products. Any
failure by the Company to anticipate or respond on a
<PAGE> 12
Page 12
cost-effective and timely basis to technological developments, changes in
industry transmission standards or customer requirements, or any significant
delays in product development or introduction could have a material adverse
effect on the Company's business. There can be no assurance that the Company
will be able to successfully develop new products to address new industry
transmission standards and technological changes or to respond to new product
announcements by others, or that such products will achieve market acceptance.
The Company may acquire from time to time, complementary businesses, products or
technologies. In connection with such acquisitions, the Company may be required
to commit substantial capital and human resources and may incur increased
expenses. In February 1996, the Company acquired certain assets of ACD and in
July 1996, the Company acquired certain assets of the SSN division of MPR
Teltech. As the Company invests in product development, marketing, and sales
support for the acquired assets, the associated expenses could have an adverse
effect on the Company's business, operating results and financial condition.
Dependence on Suppliers and Subcontractors; Need to Make Advance
Purchase Commitments. Certain components used in the Company's T3AS products and
Remote Module product, including its VLSI ASICs and other components, are
available from a single source or a limited number of sources. The Company has
no supply agreements and generally makes its purchases with purchase orders.
Further, certain components require an order lead time of up to one year. Other
components that currently are readily available may become difficult to obtain
in the future. Failure of the Company to order sufficient quantities of these
components in advance could prevent the Company from increasing production in
response to customer orders in excess of amounts projected by the Company. In
the past, the Company has experienced delays in the receipt of certain of its
key components, which have resulted in delays in product deliveries. There can
be no assurance that delays in key component and part deliveries will not occur
in the future. The inability to obtain sufficient key components as required or
to develop alternative sources if and as required in the future could result in
delays or reductions in product shipments, which in turn could have a material
adverse effect on the Company's customer relationships and operating results.
Additionally, the Company uses third-party subcontractors for the manufacture of
its subassemblies. This reliance on third-party subcontractors involves several
risks, including the potential absence of adequate capacity, the unavailability
of or interruption in access to certain process technologies, and reduced
control over product quality, delivery schedules, manufacturing yields and
costs. Shortages of raw materials or production capacity constraints at the
Company's subcontractors could negatively affect the Company's ability to meet
its production obligations and could result in increased prices for affected
parts. To procure adequate supplies of certain components, the Company must make
advance commitments to purchase relatively large quantities of such components
in a number of circumstances. A large portion of the Company's purchase
commitments consist of custom parts, some of which are sole-source such as VLSI
ASICs, for which there is no alternative use or application. The inability of
the Company to incorporate such components in its products could have a material
adverse effect on the Company's business, operating results and financial
condition.
Product Recall. Producers of telephone network equipment, including test
access and performance monitoring systems such as those being marketed by the
Company, are often required to meet rigorous standards imposed by Bellcore, the
research and development entity created following the divestiture of AT&T to
provide ongoing engineering support to the RBOCs. In addition, the Company must
meet specialized standards imposed by its customers. The Company's systems are
also required to interface in a complex and changing environment with
telecommunication network equipment made by numerous suppliers. In the event
there are material deficiencies or defects in the design or manufacture of the
Company's systems, or if the Company's systems become incompatible with existing
third-party network equipment, the affected products could be subject to a
recall. The Company has experienced two significant product recalls in its
history and there can be no assurance that the Company will not experience any
product recalls in the future. The cost of any subsequent product recall and
associated negative publicity could have a material adverse effect on the
Company's business, operating results and financial condition.
<PAGE> 13
Page 13
Proprietary Technology. The Company relies on a combination of technical
leadership, trade secret, copyright and trademark protection and non-disclosure
agreements to protect its proprietary rights. Although the Company has pursued
and intends to continue to pursue patent protection of inventions that it
considers important and for which such protection is available, the Company
believes its success will be largely dependent on its reputation for technology,
product innovation, affordability, marketing ability and response to customer's
needs. Currently, the Company has five U.S. patents granted and three U.S.
patent applications allowed. Additionally, the Company has nine pending U.S.
patent applications and two international (Patent Cooperation Treaty)
applications on file covering various circuit and system aspects of its
products. There can be no assurance that the Company will be granted additional
patents or that, if any patents are granted, they will provide the Company with
significant protection or will not be challenged. As part of its confidentiality
procedures, the Company generally enters into non-disclosure agreements with its
employees and suppliers, and limits access to and distribution of its
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's technology without
authorization. Accordingly, there can be no assurance that the Company will be
successful in protecting its proprietary technology or that ADA's proprietary
rights will preclude competitors from developing products or technology
equivalent or superior to that of the Company. The telecommunications industry
is characterized by the existence of a large number of patents and frequent
litigation based on allegations of patent infringement. The Company is not aware
of infringement by its products or technology of the proprietary rights of
others. There can be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such
assertions will not result in costly litigation or require the Company to obtain
a license to intellectual property rights of such parties. There can be no
assurance that any such licenses would be available on terms acceptable to the
Company, if at all. Further, litigation, regardless of outcome, could result in
substantial cost to and diversion of efforts by the Company. Any infringement
claims or litigation against the Company could materially and adversely affect
the Company's business, results of operations and financial condition. Moreover,
the laws of some foreign countries do not protect the Company's proprietary
rights in the products to the same extent as do the laws of the United States.
Dependence on Key Personnel. The success of the Company is dependent, in
part, on its ability to attract and retain highly qualified personnel.
Competition for such personnel is intense and the inability to attract and
retain additional key employees or the loss of one or more current key employees
could adversely affect the Company. There can be no assurance that the Company
will be successful in hiring or retaining requisite personnel.
Volatility of Stock Price. The Company's future earnings and stock price
may be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenue or earnings from levels expected by public market analysts
and investors could have an immediate and significant adverse effect on the
trading price of the Company's common stock.
<PAGE> 14
Page 14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
For a complete discussion of the legal proceedings settled in the
first quarter of 1996, see the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995/Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1996. From time to time, ADA may be involved in
litigation relating to claims arising out of its operations in the normal
course of business. As of the date of this Quarterly Report, the Company is
not a party to any legal proceedings.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
------- -----------
10.1* Asset Purchase Agreement between Applied Digital Access,
Inc. and MPR Teltech, Ltd. (Exhibit 2.1)
10.2** Master Agreement between Northern Telecom, Ltd. and
Applied Digital Access, Inc. dated July 16, 1996.
10.3 Stock Purchase Agreement between Applied Digital Access,
Inc. and MPR Teltech, Ltd. dated July 16, 1996.
10.4** License Agreement between Northern Telecom Ltd. and Applied
Digital Access, Inc.
10.5 Second Amendment to Lease between Sorrento Tech Associates
and Applied Digital Access, dated August 8, 1996.
10.6 Lease Agreement between Rose Hulman Institute of
Technology, through its authorized leasing agent, Ragle
and Company, and Applied Digital Access dated September
15, 1996.
10.7 Agreement for Extension of Term, Amendment No. 2 to
General Purchasing Agreement between US WEST
Communications, Inc. and Applied Digital Access, Inc.
dated August 15, 1996.
11.1 Statement regarding computation of net income (loss) per
share.
27.1 Financial Data Schedule.
* Incorporated by reference to the same numbered exhibit (except as
otherwise referenced) in the Company's Form 8-K filed by the Company
with the SEC on July 31, 1996 in connection with the Company's
acquisition of certain assets of the SSN division of MPR Teltech.
** Certain confidential portions of this Exhibit were omitted by
means of marking such portions with an asterisk (the "Mark"). This
Exhibit has been filed separately with the Secretary of the
Commission without the Mark pursuant to the Company's application
Requesting Confidential Treatment under Rule 24b-2 under the
Securities Exchange Act of 1934.
(b) Reports on Form 8-K.
On July 31, 1996, the Company filed a report on Form 8-K in
connection with the acquisition of certain assets of the SSN division
of MPR Teltech.
On September 30, 1996, the Company filed a report on Form 8-K/A to
provide financial statements of the SSN division of MPR Teltech as
required by Regulation S-X, along with applicable pro forma financial
information required pursuant to Article 11 of Regulation S-X.
<PAGE> 15
Page 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Applied Digital Access, Inc.
Date: November 14, 1996 /s/ Peter P. Savage
----------------- --------------------
Peter P. Savage
Director
President and Chief Executive
Officer
Date: November 14, 1996 /s/ James L. Keefe
----------------- -------------------
James L. Keefe
Vice President Finance and
Administration and Chief
Financial Officer
<PAGE> 1
CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.8(b), 200.83 AND
230.406 * INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL
TREATMENT REQUEST THAT IS FILED SEPARATELY WITH THE COMMISSION
EXHIBIT 10.2
MASTER AGREEMENT
Between
NORTHERN TELECOM LIMITED
And
APPLIED DIGITAL ACCESS, INC.
<PAGE> 2
TABLE OF CONTENTS
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<TABLE>
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Page
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<S> <C>
ARTICLE 1 - DEFINITIONS .............................................. 2
ARTICLE 2 - CONTRACT DOCUMENTS ....................................... 4
ARTICLE 3 - SCOPE OF WORK ............................................ 6
ARTICLE 4 - PERIOD OF PERFORMANCE .................................... 7
ARTICLE 5 - CONSIDERATION ............................................ 7
ARTICLE 6 - PAYMENT SCHEDULE ......................................... 8
ARTICLE 7 - INVOICES ................................................. 9
ARTICLE 8 - AUDIT .................................................... 9
ARTICLE 9 - INFORMATION FROM NORTEL .................................. 10
ARTICLE 10 - STATUS REPORTS ........................................... 11
ARTICLE 11 - MEETINGS ................................................. 11
ARTICLE 12 - INDEPENDENT CONTRACTOR ................................... 11
ARTICLE 13 - CHANGE CONTROL PROCEDURES AND ACCEPTANCE ................. 11
ARTICLE 14 - FORECASTS ................................................ 13
ARTICLE 15 - TERMINATION FOR CONVENIENCE .............................. 15
ARTICLE 16 - TERMINATION FOR DEFAULT .................................. 16
ARTICLE 17 - CHANGE IN CONTROL ........................................ 18
ARTICLE 18 - INVENTIONS AND IMPROVEMENTS .............................. 18
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 19 - RIGHTS NOT CONFERRED ..................................... 19
ARTICLE 20 - ASSIGNMENT ............................................... 19
ARTICLE 21 - COMPLIANCE WITH LAW ...................................... 19
ARTICLE 22 - PUBLICITY RELEASE ........................................ 19
ARTICLE 23 - CONFIDENTIAL INFORMATION ................................. 20
ARTICLE 24 - PATENTS AND INFORMATION .................................. 21
ARTICLE 25 - WARRANTY AND LIABILITY ................................... 22
ARTICLE 26 - SPONSORS AND PRIMES ...................................... 23
ARTICLE 27 - NOTICES .................................................. 23
ARTICLE 28 - APPLICABLE LAW ........................................... 24
ARTICLE 29 - CONTINUING OBLIGATIONS ................................... 25
ARTICLE 30 - WAIVERS .................................................. 25
ARTICLE 31 - TERM OF AGREEMENT ........................................ 25
ARTICLE 32 - ENTIRETY OF CONTRACT ..................................... 25
ARTICLE 33 - APPENDICES ............................................... 26
ARTICLE 34 - FORCE MAJEURE ............................................ 26
ARTICLE 35 - ARBITRATION .............................................. 26
ARTICLE 36 - AMENDMENT ................................................ 27
ARTICLE 37 - WITHHOLDING .............................................. 27
</TABLE>
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<PAGE> 4
THIS MASTER AGREEMENT is made as of the __ day of July, 1996.
BETWEEN:
NORTHERN TELECOM LIMITED, a company incorporated under the laws of
Canada, having its head office at 2920 Matheson Boulevard East,
[Mississaupa], Ontario (hereinafter called "Nortel"),
OF THE FIRST PART
AND:
APPLIED DIGITAL ACCESS, INC., a company incorporated under the laws of
the State of California, having its head office at 9855 Scranton Road,
San Diego, California, 92121, USA
(hereinafter called "ADA"),
OF THE SECOND PART
WHEREAS:
A. MPR Teltech Ltd. ("MPR Teltech") had previously entered into a Master
Agreement with Prism Systems, Inc. ("Prism Systems") dated December 11,
1992 (the "Prior Agreement"), pursuant to which MPR Teltech performed
certain research and development activities for Prism Systems from time
to time subject to the terms and conditions of such agreement;
B. ADA has acquired certain assets from MPR Teltech pursuant to that
certain Asset Purchase Agreement dated the date hereof;
C. Nortel has previously acquired all of the assets of Prism Systems and
integrated such assets into Nortel as the Nortel Network Services
Management Division ("NSM"); and
D. ADA and Nortel wish to restructure the terms and conditions of the
Prior Agreement to provide that: (1) ADA has research and development
capabilities and resources which Nortel wishes to draw upon from time
to time; and (2) Nortel desires to have ADA perform research and
development activities for Nortel from time to time subject to the
terms and conditions of this Master Agreement.
NOW THEREFORE in consideration of the premises and of the mutual covenants and
agreements hereinafter set forth and contained, this agreement witnesseth:
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<PAGE> 5
ARTICLE 1 - DEFINITIONS
In this Master Agreement and any Work Schedule, unless there is something in the
subject matter or context inconsistent therewith, the expressions following
shall have the meanings indicated below:
"ADA Prime" has the meaning ascribed thereto in Section 26.1 hereof.
"Acceptance" has the meaning ascribed thereto in Section 13.4 hereof.
"Business Day" means each of Monday, Tuesday, Wednesday, Thursday and Friday,
except when any such day occurs on a statutory holiday in British Columbia;
"Commercial Specifications" means the specifications approved by Nortel for use
in developing Custom Software and Custom Hardware and upon which the technical
proposal is based;
"Contract Amount" means the dollar amount specified in the Work Schedule to be
paid to ADA;
"Custom Hardware" means the hardware which is to be developed by ADA under the
Work Schedule in accordance with the specifications referred to in such Work
Schedule, including all related documentation to the extent of ADA's legal right
to do so.
"Custom Software" means the computer programs which are to be developed by ADA
under the Work Schedule in accordance with the Commercial Specifications
referred to in such Work Schedule, including all source and object code listings
and all related documentation and design data, including but not limited to,
design specifications and descriptions, change control documents, calculation
formulae and algorithms for such software;
"Deliverables" means those items (tangible and/or intangible) which are
identified in the Work Schedule and which are to be provided to Nortel by ADA
pursuant to the applicable Development Agreement, and shall include items such
as, but not be limited to Custom Hardware, Hardware, Custom Software, Software,
Services, details of the development environment documentation, reports,
schedules and specifications as specified in the applicable Development
Agreement;
"Development Agreement" means this Master Agreement and any Work Schedule
attached hereto pursuant to Section 2.6 hereof;
"Full Price" means the full price for Work under a Development Agreement as
determined in accordance with the formula set forth in Appendix A or otherwise
as set forth in the Work Schedule or Development Agreement.
-2-
<PAGE> 6
"Hardware" means original equipment manufacture (OEM) equipment which is to be
developed or qualified by ADA in accordance with the specifications referred to
in the Work Schedule, including all mechanical and electrical drawings for
components specified to the extent of ADA's legal right to do so.
"Master Agreement" means this document;
"Milestones" means the intermediate and final achievement dates specified in the
relevant Work Schedule that act as guide-posts for monitoring the progress of
the Work by identifying particularly critical portions of the Work and their
completion deadlines;
"Nortel Customer" means the end user, if any, identified in the Work Schedule to
whom Nortel will be providing the Custom Software under such Work Schedule;
"Nortel Prime" has the meaning ascribed thereto in Section 26.1 hereof.
"Other Arrangements" means other business relationships between Nortel and ADA
(or their respective subsidiaries or affiliates), including individual
development contracts, that may be conducted on terms and conditions other than
the terms and conditions set forth in this Master Agreement, as more fully
described in Section 2.8 hereof.
"RFQ", or "Request for Quotation" has the meaning ascribed thereto in Section
2.1(b) hereof;
"Services" means the services specified in the Work Schedule to be provided by
ADA;
"Software" means the third-party software which is to be qualified by ADA in
accordance with the specifications referred to in the Work Schedule. Where such
software is required to be delivered to Nortel, or to be incorporated in a
Deliverable, this requirement shall be subject to ADA having the legal right to
do so, or to have Nortel's do so;
"Technical Proposal" means a systems requirements document, preliminary project
plan, quality plan, preliminary design review, high level design document,
interface specifications document, trackable schedule and integrated plan based
upon a Commercial Specification or equivalent as described in Section 2.1 hereof
and as set forth in ADA Document Number 20-0301-0000 (Product Development
Overview), for product development phases as follows: project inception phase,
systems requirements phase, preliminary design phase and high level design
phase.
"Work" means the research and development activities, including development of
the Custom Software or Hardware, as applicable, specified in the Work Schedule;
"Work Schedule" means the added specific details of the Work to be done,
attached to or
-3-
<PAGE> 7
referencing this Master Agreement which is mutually agreed to in writing by the
parties, as amended from time to time as set forth in Article 13 below.
ARTICLE 2 - CONTRACT DOCUMENTS
2.1 a) When Nortel identifies an opportunity for which it requires ADA's
services, Nortel shall prepare a Commercial Specification or equivalent
which it will attach to a RFQ with sufficient information to enable ADA
to prepare the quotation described in Section 2.2 below.
b) All RFQ's shall indicate one of the following;
i) If ADA shall only be required to prepare a Technical Proposal, but
not be obliged to perform any further Work upon completion of that
Technical Proposal, as contemplated in Section 2.4 below.
ii) If ADA shall be required to commit to performing the Work
identified in the completed Technical Proposal in accordance with
Section 2.4 below, if requested to do so by Nortel.
iii) If neither i) or ii) above are specified, the parties shall meet,
after the Technical Proposal is completed, to determine what
further action, if any, they will take with respect to that
Technical Proposal.
2.2 Based upon the Commercial Specification and the RFQ, ADA will use its
best efforts (if such request can be accomplished within the current
resource commitment of Nortel) and its reasonable efforts (if such
request must be addressed by resources outside of the current Nortel
Commitment) to prepare a quotation for the preparation of a Technical
Proposal using the resources that are then committed by ADA under
Nortel's Firm Commitment (as defined in Article 14 below).
2.3 If Nortel accepts the quotation within the time frame for acceptance
set out in the quotation, if any, it shall signify such acceptance by
means of a purchase order approving the preparation of the Technical
Proposal by ADA.
2.4 Upon completion of the Technical Proposal and subject to Section 2.1 b)
above, Nortel may request ADA to perform certain Work based upon the
Technical Proposal, by means of a Work Schedule issued to ADA by
Nortel, along with a purchase order.
2.5 ADA shall, within five (5) Business Days of its receipt of the purchase
order and attached Work Schedule described in Section 2.4, advise
Nortel in writing of ADA's acceptance or rejection of the Work
Schedule. For Technical Proposal prepared pursuant to subsection
-4-
<PAGE> 8
2.1 b) ii), ADA shall acknowledge acceptance of the purchase order and
attached Work Schedules, within five (5) Business Days of receipt.
2.6 Upon Nortel's receipt of the written acceptance of the purchase order
and attached Work Schedule by ADA, a contract for the performance of
the Work described in the Work Schedule will, in each case, be formed.
Each such Development Agreement will consist exclusively of the terms
and conditions of this Master Agreement and the Work Schedule related
thereto. In case of conflict between this Master Agreement and the Work
Schedule, this Master Agreement shall govern unless it is specifically
provided in the Work Schedule that the Work Schedule is to govern.
2.7 The Work Schedule shall specify the Work to be done and Deliverables to
be provided and shall include provisions with respect to the following:
- the scope of the Work
- the estimated Contract Amount
- the project organization
- the project schedule including milestones
- the payment schedule
- Deliverables
- delivery dates
- the acceptance plan, conditions and specifications
- Nortel's responsibilities
- the change control procedure
and may include provisions with respect to the following:
- development process
- the decision request procedure
- shipping and transit insurance
- travel and living
- provisions relating to follow-on work
- liquidated damages for late delivery
- additional ADA responsibilities
- assumptions and dependencies
- resource allocations
- risk assessment
- quality and process standards
2.8 The parties acknowledge that from time to time, and notwithstanding
anything else in this Master Agreement, they may enter into Other
Arrangements, on terms different from those set out in this Master
Agreement. To the extent the Other Arrangements are entered
-5-
<PAGE> 9
into by ADA and Nortel solely on behalf of NSM: (i) if the terms of the
Other Arrangements are different from the terms set out in this Master
Agreement, the terms of the Other Arrangements shall apply; and (ii) if
the terms are not defined by the Other Arrangements, the terms of this
Master Agreement shall apply. Other Arrangements entered into on behalf
of a Nortel division, subsidiary or affiliate other than NSM shall not
be subject to the terms of this Master Agreement. The parties also
agree that, due to the requirements of the Nortel Licensing Agreements
with its parent companies, for any Other Arrangements to be valid, the
Other Arrangement must be executed by two officers of Nortel, failing
which the Other Arrangement shall be void and unenforceable by either
party.
2.9 ADA shall have the right to subcontract to ADA Canada, Inc. any
Services or Work, or portion thereof, and will give Nortel notice of
any such subcontract.
ARTICLE 3 - SCOPE OF WORK
3.1 ADA shall furnish all personnel, materials and supervision necessary to
perform the Work as defined in the Development Agreement, in accordance
with the terms of the Work Schedule.
3.2 Nortel shall have the right, at any time while the Work is in progress
and after review of progress reports, to order changes in the Work
pursuant to Article 13. Unless otherwise agreed to in writing the
provisions of this Master Agreement shall apply to all changes in the
Work.
3.3 (a) ADA shall have documented an auditable development process prior to
the commencement of any Work under any Development Agreement.
(b) ADA will be required to maintain its quality program as currently
defined by MPR Teltech's QA-QP-940601 and the referenced procedures, as
eventually merged into ADA's quality program defined by ADA20-0296-0000
Quality Manual which is based upon the relevant sections of ISO9001 and
BellCore TR-NWT-001252, unless deviations are defined in the
Development Agreement.
ARTICLE 4 - PERIOD OF PERFORMANCE
4.1 Both Nortel and ADA agree that time shall be of the essence herein and
ADA shall use its best efforts, within the current resource commitment
of Nortel, to commence and complete the Work in accordance with the
Work Schedule.
ARTICLE 5 - CONSIDERATION
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5.1 ADA shall be paid the Contract Amount for performance of the Work in
accordance with one of the following payment options and the selection
of the appropriate payment option for each Development Agreement will
be described in the Work Schedule:
(A) Time and Material Payment Option, which shall include the
following:
(i) An estimate of the price to Nortel to perform the Work, together
with an estimate of the price to perform that portion of the Work
applicable to each Milestone.
(ii) ADA will invoice Nortel monthly for the Work on the following
basis:
a. The actual hours required to perform the Work, in accordance
with the provisions of the Work Schedule, multiplied by the hourly rate
per employee classification, as agreed to by the parties;
b. All materials, contractors, and other preapproved project
expenses reasonably incurred by ADA in connection with the performance
of the Work, at cost plus a markup as set out in Appendix A;
c. All pre-approved travel expenses reasonably incurred by ADA in
connection with the performance of the Work, at cost plus a markup as
set out in Appendix A.
(iii) Changes to the rates set forth in Appendix A hereto will be
subject to revision as provided in Appendix A.
(iv) ADA shall notify Nortel forthwith upon ADA becoming aware during
the course of performance of the Work that the actual price of the Work
or any portion of the Work applicable to any Milestone is likely to
exceed the estimated price of the Work or portion of the Work, as the
case may be (hereinafter called the "Budget Overrun").
In addition to such notice, ADA shall forthwith provide Nortel
with a written report setting out ADA's explanation or understanding of
the causes of any such Budget Overrun and ADA's estimate of the cost to
Nortel to complete the Work or that portion of the Work applicable to
the Milestone.
(v) At such time as the price of performance of the Work equals the
estimated total price of the Work prior to completion of the Work, ADA
shall advise Nortel and no further costs shall be incurred by ADA
without the prior written consent of Nortel. Nortel will provide such
written consent in a timely manner, or will instruct ADA as to what
action to take with regard to the unfinished Work.
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(B) Firm Price Option, which will mean ADA will perform the Work
for a firm cost agreed upon in advance and set forth in the Work
Schedule. ADA shall be solely responsible for any Budget Overruns.
5.2 The Contract Amount, unless otherwise specifically provided in such
Work Schedule, is exclusive of any goods and services tax, custom and
excise duties, provincial, sales, use, ad valorem, or franchise taxes,
or other similar taxes or duties. Any such amounts billed by ADA to
Nortel will be paid promptly 30 days from the date of receipt of the
invoice to be paid, however, Nortel shall have 10 days to dispute any
invoice, failing which the invoice shall be paid within the
aforementioned 30 days. Payment shall not be due until the dispute is
settled.
5.3 ADA provides no warranty, actual or implied, that the work performed
will qualify as eligible scientific research and experimental
development as defined in the Income Tax Act. ADA agrees that it will
take all commercially reasonable steps and provide all reasonable
assistance to establish such eligibility, at Nortel request and
expense.
5.4 The parties acknowledge that certain Work Schedules may contain Work to
be carried out partly under both Payment Options.
ARTICLE 6 - PAYMENT SCHEDULE
6.1 Any Development Agreement entered into between Nortel and ADA pursuant
to the terms of this Master Agreement shall provide for payment to be
made pursuant to the following options:
(a) Time and Material Payment Option:
Under the Time and Material Payment Option, ADA will issue monthly
invoices to Nortel in connection with the Work in accordance with the
provisions of Section 5.1 (A) (ii) hereof. Prior to the issuance of any
invoice, the ADA Prime, shall certify to Nortel in writing that such
amounts were calculated according to the formula set forth in Appendix
A, to be updated quarterly and as updated, attached hereto and
incorporated herein by reference, and were reasonably expended or
incurred by ADA in the performance of the Work and attach said writing
to the invoice. ADA will be paid the amount so invoiced, as described
in Article 7 below.
(b) Firm Price Option:
Under the Firm Price Option, unless agreed otherwise in the Work
Schedule, ADA shall only issue an invoice upon delivery of any of the
Deliverables, which invoice shall become due on Acceptance of those
Deliverables for the value of those Deliverables, as
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set out in the Work Schedules.
6.2 An alternative payment arrangement may be negotiated for each project
by mutual written agreement of Nortel and ADA.
ARTICLE 7 - INVOICES
7.1 A maximum of one invoice per month shall be issued for each purchase
order issued by Nortel. Labour will be broken down into total hours and
total dollars per invoice and expenses incurred will be broken down by
category in accordance with ADA's normal accounting methods. Terms of
payment shall be thirty (30) days from date of receipt of invoice by
Nortel provided, however, that Nortel shall be entitled to retain
twenty (20%) per cent of the aggregate amount of all such invoices
under Firm Price Option contracts, until the fortieth (40th) day
following Acceptance of the Work. Nortel shall have ten (10) days from
receipt of invoice to dispute the accuracy of the invoice, failing
which the invoice shall be due as aforesaid. Payment shall not be due
until the dispute is settled.
7.2 Nortel shall pay simple interest at the rate of prime plus one percent
on all overdue amounts owing to ADA after thirty (30) days.
ARTICLE 8 - AUDIT
8.1 ADA agrees to keep and maintain complete and accurate records of costs
incurred in connection with the performance of the Work, and maintain
books and accounts in accordance with generally accepted accounting
procedures, principles and practices, and in accordance with such other
procedures, principles and practices as may be specified in the
applicable Work Schedule respecting all matters pertinent to this
Master Agreement and any Development Agreements formed hereunder. Upon
notice in writing, and at its expense, Nortel through its independent
auditors shall have access to and the right to audit all accounts and
records maintained for the Work during normal business hours. Provided,
however, that Nortel independent auditors shall not, unless otherwise
provided in the applicable Work Schedule, have such access or right to
audit such accounts and records for Work performed under the Firm Price
Option, save and except where the Development Agreement for the Work
has been terminated by Nortel in accordance with Article 16. Any claims
or discrepancies disclosed by such audit shall be made in writing to
ADA within a reasonable period of time after completion of such audit
for resolution between the Nortel Prime and the ADA Prime or by
reference to more senior management.
ARTICLE 9 - INFORMATION FROM NORTEL
9.1 ADA shall use its commercially reasonable efforts to identify in the
Work Schedule all
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information or documentation required for it to perform the Work and
deliver the Deliverables in the Work Schedule. However, if in execution
of the Work, ADA shall require additional information or documents from
Nortel, Nortel shall provide same, if possible, promptly upon written
request and reasonable notice from ADA. If Nortel fails to respond to
any request for information or documents as herein provided and the
failure to provide such information or documents results in ADA not
being able to meet its Milestones as set forth in the Work Schedule,
the Milestones shall be extended by the length of the period of delay
so caused.
9.2 In the event any Milestones are extended due to the unavailability of
information and documents from Nortel, ADA agrees to use reasonable
efforts to allocate its manpower to other Work and to advise Nortel in
the event such manpower cannot, after the exercise of reasonable
efforts, be allocated to other Work.
9.3 As an alternative to extension of any Milestone, Nortel may direct ADA
to make assumptions regarding the information or documents required by
ADA from Nortel. Nortel will approve any reasonable assumptions made by
ADA and if such assumptions are subsequently shown to be invalid,
Nortel will provide ADA written approval to proceed with any necessary
re-Work and will treat such re-Work as a change in the Work pursuant to
Section 13.2.
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ARTICLE 10 - STATUS REPORTS
10.1 Status reports shall be detailed periodically or as set forth in the
Work Schedule and shall summarize progress, problems, financial
expenditure (including ADA's estimate of the price to complete the
Work), and highlights in the execution of the Work. ADA shall respond
promptly, verbally or in writing, if requested by Nortel to any
comments or queries of Nortel resulting from the review of status
reports. ADA shall notify Nortel immediately upon the satisfaction or
achievement of any Milestone or upon any Deliverable becoming available
for evaluation by Nortel or delivery to Nortel.
ARTICLE 11 - MEETINGS
11.1 At the request of either party and as specified in the Work Schedule,
Nortel and ADA shall meet to discuss matters related to the Work
including progress, review of results, analysis of problems, financial
expenditures, adequacy of information to be provided by Nortel pursuant
to Article 9 of the Development Agreement and changes in the Work.
11.2 Any costs incurred by ADA in participating in such meeting will:
(i) in the case of the Time and Material Payment Option, be billed to
Nortel as part of the Work,
(ii) in the case of Work performed under the Firm Price Payment
Option, be included in the Firm Price as an anticipated and reasonable
expense in performing the Work.
ARTICLE 12 - INDEPENDENT CONTRACTOR
12.1 In the execution of the Work provided for herein, ADA shall operate as
an independent contractor, and nothing in this Master Agreement or any
Development Agreement formed hereunder shall be construed to constitute
ADA or any of its employees as an agent, representative or employee of
Nortel.
ARTICLE 13 - CHANGE CONTROL PROCEDURES AND ACCEPTANCE
13.1 The Work Schedule shall have a corresponding change control section to
accommodate requests by Nortel for changes to the scope of the Work.
Such requests for change are subject to the procedures set out in this
Article 13.
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13.2 Nortel-Originated Changes
Nortel may request changes to the Work in accordance with the following
procedure:
(a) Nortel shall advise ADA, in writing, of a desired change specifying
the desired change with sufficient details to enable ADA to evaluate
the change.
(b) Following receipt of a change request ADA will within five (5)
Business Days provide Nortel with an estimate (the "Preliminary
Estimate") of the estimated time to assess the change and the estimated
price of preparing such assessment. If ADA determines that it cannot
prepare the Preliminary Estimate within such period, ADA will advise
Nortel of the date by which the Preliminary Estimate will be available
and ADA will deliver the Preliminary Estimate by such date.
(c) Following receipt of the Preliminary Estimate, Nortel will, within
five Business Days (the "Response Period"), advise ADA in writing
whether or not to proceed with the assessment of the requested change.
If Nortel advises ADA not to proceed, the change request shall be
deemed withdrawn and ADA shall take no further action in respect of it.
If ADA has not received written notice to proceed within the Response
Period, Nortel shall be deemed to have advised ADA not to proceed.
(d) If Nortel instructs ADA to proceed, ADA will prepare an assessment
(the "Assessment") of the impact, if any, of the desired change on the
Contract Amount, the Milestones, the time frame for completion, the
performance of the Deliverables and any other areas which in the
opinion of ADA are likely to be affected by the requested change.
(e) The Assessment shall constitute an offer from ADA to carry out
changes as requested subject to the provisions of the Assessment. The
offer shall be irrevocable for five (5) Business Days following the
receipt thereof by Nortel.
(f) If Nortel accepts ADA's offer, the Work Schedule shall be deemed to
incorporate the change on the terms stated in the Assessment.
(g) ADA shall be entitled to recover outside any limit of maximum
expenditure specified in the Work Schedule, the price of preparation of
the Preliminary Estimate and the Assessment regardless of whether the
Assessment or change is proceeded with.
(h) Any change which either increases or decreases costs or modifies
Milestones or Deliverables, shall be implemented only with the prior
written consent of the Nortel Prime and the ADA Prime.
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13.3 ADA-Originated Changes
In the event ADA wishes to request a change it shall notify Nortel in
writing of the suggested change and provide Nortel with a Preliminary
Estimate and the provisions of 13.2 (c), (d), (e), (f) and (g) shall
apply except that ADA shall not be entitled to recover the cost of
preparing the Preliminary Estimate.
13.4 Acceptance of Work Performed Under Firm Price Option
Acceptance of Work performed under the Firm Price Option ("Firm Price
Work") shall only occur after delivery of the Deliverable to Nortel and
only in the event that there are no priority 1 and 2 problems, as
defined by the MPR classification system dated August 10, 1992,
identified during the verification testing stage, which testing is
performed by Nortel. The test plan shall be approved by ADA for Firm
Price Work where such procedure is not feasible, the alternate
acceptance procedure shall be set out in the Work Schedule.
Notwithstanding the foregoing, Nortel will accept or reject the Firm
Price Work within sixty (60) days after delivery by ADA; failure to
give notice of acceptance or rejection within that period by Nortel
will constitute acceptance.
ARTICLE 14 - FORECASTS
14.1 Nortel shall provide ADA with non-binding written twelve (12) month
rolling forecasts ("Non-Binding Forecasts") by month of ADA-resource
requirements and associated Development Agreements or Development
Agreements Nortel expects to place together with expected funding from
Nortel for such Development Agreements. The initial Non-Binding
Forecast shall be attached to this Agreement as Appendix B and shall be
updated monthly by Nortel by the last business day of the first month
included in the twelve (12)-month period covered by the latest
Non-Binding Forecast and shall be delivered to ADA no later than the
last business day of the month prior to the initial month included in
such updated Non-Binding Forecast. The non-binding funding commitment
and resource requirement (the "Non-Binding Commitments") shall be set
out in the format of the chart used in Appendix B of this Agreement.
Such Non-Binding Forecasts shall be solely for the purpose of allowing
ADA to allocate and plan for resource requirements in such 12-month
period and shall not be considered binding obligations of Nortel.
14.2 Nortel shall also provide ADA with binding written nine (9) month
rolling forecasts ("Firm Forecasts") by month of ADA-resource
requirements and associated Development Agreements or Development
Agreements Nortel expects to place together with expected funding from
Nortel for such Development Agreements. The initial Firm Forecast shall
be attached to this Agreement as Appendix C, shall provide for a
minimum of ** people for each of the nine (9) months and shall be
updated monthly by Nortel by the last business day of the first month
included in the nine (9)-month period covered by the
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latest Firm Forecast and shall be delivered to ADA no later than the
last business day of the month prior to the initial month included in
such updated Firm Forecast. The Firm Forecast funding commitment and
resource requirement (the "Firm Commitments") shall be set out in the
format of the chart used in Appendix C of this Agreement. Subject to
Sections 14.4, 14.5 and 14.6 below, such Firm Forecasts shall be
binding obligations upon Nortel to issue Development Agreements
sufficient to meet such Firm Forecasts or to accept billings by ADA for
the Firm Commitments set forth for such month in the most recent Firm
Forecast.
14.3 For Development Agreements issued in accordance with this Article 14,
ADA shall confirm its acceptance thereof, which acceptance shall
include a commitment to staffing levels as set out in the Firm
Forecast. Changes to any aspect of the Firm Forecast may be made at any
time upon mutual agreement.
14.4 The initial Firm Forecast shall provide for Firm Commitments on a
monthly basis for nine (9) months. The Firm Commitments for the last
calendar quarter, or months seven, eight and nine, of such initial Firm
Forecast and any subsequent Firm Forecast shall be referred to as the
"Base Funding Levels." Subject to Sections 14.5 and 14.6 below, the
average Firm Commitments (as measured by funding levels) for the last
calendar quarter (or months seven, eight and nine) of any three
sequential Firm Forecasts may not vary by more or less than ** from
the Base Funding Levels of the immediately preceding Firm Forecast.
14.5 In the event that the aggregate Firm Commitments (as measured by
funding levels) for the last calendar quarter of any three sequential
Firm Forecasts as described in Section 14.4 above increases by more
than ** from the Base Funding Levels of the immediately preceding Firm
Forecast, ADA may: (a) accept the new Firm Forecast within ten (10)
days of receipt thereof; or (b) accept a portion of the additional
funding greater than ** of the Base Funding Levels of the immediately
preceding Firm Forecast, and instruct Nortel to acquire additional
development resources to meet the shortfall.
14.6 In the event that the aggregate Firm Commitments (as measured by
funding levels) for the last calendar quarter of any three sequential
Firm Forecasts as described in Section 14.4 above decreases by more
than **, ADA may: (a) accept the new Firm Forecast within ten (10)
days of receipt thereof; or (b) accept a portion of the decreased
funding greater than ** of the Base Funding Levels of the immediately
preceding Firm Forecast, and instruct Nortel that ADA cannot accept a
greater decrease without reimbursement by Nortel to ADA for all actual,
directly auditable costs actually incurred as a result of the decreased
funding, including without limitation third-party cancellation costs
for subcontractors directly involved in the cancelled Work,
out-of-pocket expenditures and severance payments to employees that are
terminated by ADA as a
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result of Nortel's decreased funding.
14.7 ADA agrees to reduce Nortel's commitment from the then current
commitment under this Section 14 to the extent that Nortel transfers
commercial relationships to ADA, and ADA accepts such transfer, as
contemplated in the Memorandum of Understanding between Nortel and ADA
(or its subsidiary) of the same date.
ARTICLE 15 - TERMINATION FOR CONVENIENCE
15.1 Subject to the terms and conditions of this Master Agreement, Nortel
may, from time to time by giving written notice to ADA, terminate any
Development Agreement with respect to all or any portion of the Work.
Upon such termination notice being given, ADA shall cease performance
of the Work in accordance with and to the extent specified in such
notice. Nortel may, at any time, give one or more additional
termination notices with respect to all or any portions of the Work not
terminated by any previous termination notice.
15.2 Subject to the terms and conditions of this Master Agreement, ADA may,
from time to time by giving written notice to Nortel, terminate any
Development Agreement with respect to all or a portion of the Work.
15.3 Upon termination by Nortel pursuant to Section 15.1:
(a) Nortel's Commitments shall be those contained in the most recently
accepted Firm Forecast for the nine month period covered by such forecast; and
(b) After the end of the most recently accepted Firm Forecast, Nortel
shall pay to ADA each following month an amount equal to (at Nortel's option)
(i) the amount per month contained in such most recently accepted Firm Forecast
reduced by ** per quarter or (ii) ADA's actual directly auditable cancellation
costs actually incurred, which are limited to (A) third-party cancellation costs
for subcontractors directly involved in the cancelled Work and (B) out-of-pocket
expenditures to employees and severance payments to employees that are
terminated by ADA as a result of Nortel's termination hereunder.
15.4 Upon termination by ADA pursuant to Section 15.2, Nortel's Commitments
will be those set forth in the most recently accepted Firm Forecast,
and ADA will work to such Firm Forecast for the nine month term of the
forecast. After the end of such Firm Forecast, ADA agrees that it will
not without the consent of Nortel, reduce its commitments from that
contained for the last quarter of the most recently accepted Firm
Forecast any faster than ** per quarter, subject to Nortel's agreement
to fund such activities.
15.5 Neither party shall be held liable for indirect or consequential
damages or loss of
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anticipated profits of the other party on account of termination of
this Agreement other than as set forth in this Article 15 or in
Article 14.
ARTICLE 16 - TERMINATION FOR DEFAULT
16.1 Nortel may, at any time and from time to time, by notice of default to
ADA, terminate the whole or any part or parts of any Development
Agreement if ADA:
(i) fails to perform any of the other provisions of the Development
Agreement including performing the Work within the time or times
specified in the Work Schedule, or so fails to make progress so as to
endanger performance of the Development Agreement in accordance with
the Work Schedule, and, in either of these circumstances, does not cure
or take steps to promptly and diligently cure such failure within a
period of thirty (30) days after receipt of written notice from Nortel
or such longer period as Nortel may authorize; or
(ii)(a) applies for or consents to the appointment of a receiver,
trustee or liquidator of itself or of its property; or
(b) makes a general assignment for the benefit of creditors; or
(c) is adjudicated bankrupt or insolvent; or
(d) files a voluntary petition in bankruptcy or a petition or
answer seeking re-organization or an arrangement with creditors, or
takes advantage of any insolvency law, or admits to the material
allegations of a petition filed against it in any bankruptcy,
reorganization or insolvency proceeding, or initiates a corporate
action for the purpose of effecting any of the foregoing.
16.2 ADA may, at any time and from time to time, by notice of default to
Nortel, terminate the whole or any part or parts of any Development
Agreement if Nortel:
(i) fails to perform any of the other provisions of the Development
Agreement including payment to ADA of amounts due thereunder, and does
not cure or take steps to promptly and diligently cure such failure
within a period of thirty (30) days after receipt of written notice
from ADA or such longer period as ADA may authorize; or
(ii)(a) applies for or consents to the appointment of a receiver,
trustee or liquidator of itself or of its property; or
(b) makes a general assignment for the benefit of creditors; or
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(c) is adjudicated bankrupt or insolvent; or
(d) files a voluntary petition in bankruptcy or a petition or
answer seeking re-organization or an arrangement with creditors, or
takes advantage of any insolvency law, or admits to the material
allegations of a petition filed against it in any bankruptcy,
reorganization or insolvency proceeding, or initiates a corporate
action for the purpose of effecting any of the foregoing.
16.3 If Nortel terminates any Development Agreement as provided in Section
16.1, ADA shall have no claims for any payment save as hereinafter
provided in this Article 16.
16.4 Upon a partial termination pursuant to this Article 16, ADA and Nortel
shall continue the performance of the Development Agreement to the
extent it is not terminated or otherwise affected by such partial
termination and shall not stop, suspend or impair any other aspect or
portion of the performance of the Development Agreement.
16.5 Upon a termination of any Development Agreement pursuant to Section
16.1, and subject to Article 18 below, Nortel, in addition to any other
rights of Nortel in this Article 16, may require ADA to transfer title
and deliver to Nortel, in the manner and to the extent directed by
Nortel, any Work which has not been delivered and accepted prior to
such termination.
16.6 If, after notice of termination of the Development Agreement under the
provisions of this Article 16, it is determined by a court of competent
jurisdiction that the party allegedly in default was not in default,
such notice of termination shall be deemed to have been issued pursuant
to Article 15, TERMINATION FOR CONVENIENCE, and the rights and
obligations of ADA and Nortel shall be governed by the provisions of
that Article.
ARTICLE 17 - CHANGE IN CONTROL
17.1 In the event that ADA becomes majority owned or controlled by an entity
which is a direct competitor of Nortel, ADA shall forthwith provide
written notification to Nortel of such change in majority ownership or
control. Within thirty (30) days of receipt of such notice, Nortel may,
in its sole discretion, elect to terminate without cost or penalty
whatsoever this Master Agreement provided the acquiring entity is
reasonably determined to be a direct competitor of Nortel.
ARTICLE 18 - INVENTIONS AND IMPROVEMENTS
18.1 ADA agrees to disclose and cause its employees to disclose promptly to
Nortel any inventions, designs or improvements capable of patent,
copyright or similar protection, made or conceived by such employees
either alone or jointly with others in the course of
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or as a result of the Work done hereunder, or as a result of
information supplied hereunder, directly or indirectly, by Nortel. ADA
further agrees that all such inventions, designs or improvements shall
without further payment become and remain the sole property of Nortel.
The parties acknowledge and agree that they intend to enter into a
license agreement whereby certain rights shall be granted to ADA with
respect to the inventions, designs or improvements owned by Nortel
hereunder (the "License Agreement"). Subject to the provisions of
Article 24, it is understood that any technology, inventions, designs
or improvements owned by ADA before starting the Work remain the
property of ADA, but shall be disclosed by notice in writing to Nortel
prior to starting the Work.
18.2 ADA agrees that it shall, at the discretion and expense of Nortel take
all steps and will cause its employees to take all steps necessary to
apply for and to obtain patents, registered design or similar
protection in respect of any inventions, designs or improvements which,
by the provisions hereof, belong to Nortel in any part of the world as
Nortel may require and shall vest all such patents, registered designs
or similar protection in Nortel or as Nortel may direct; provided ADA
shall only be required to pursue such protection when the costs
associated with such pursuit are covered by the Firm Commitment
hereunder or otherwise paid by Nortel.
18.3 ADA will, at the direction and expense of Nortel, render all assistance
and cause its employees to render all assistance within their power to
obtain and maintain any such patent, registered design or similar
protection and any extension thereof.
18.4 Each party warrants that it has and will maintain in effect during the
term of this Master Agreement, appropriate agreements with its
employees to carry out the obligations as to confidentiality and
inventions and improvements.
18.5 ADA shall own any Inventions that may be retained in non-tangible form
by ADA employees who had access to the Work.
ARTICLE 19 - RIGHTS NOT CONFERRED
19.1 ADA agrees that this Master Agreement does not confer any right to do
all or any given proportion of Nortel's work.
ARTICLE 20 - ASSIGNMENT
20.1 Neither party may assign all or any portion of this Master Agreement,
any Development Agreement formed hereunder or the Work without the
other party's prior written consent, such consent not to be
unreasonably withheld. Notwithstanding the foregoing, a party may
assign and transfer this Master Agreement and its rights and
obligations hereunder to
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its parents, affiliates or subsidiaries. Furthermore, ADA may
subcontract to ADA Canada, Inc. any Services or Work, or any portion
thereof without obtaining Nortel's consent. In no event shall either
party create any contractual relation between any third party and the
other.
ARTICLE 21 - COMPLIANCE WITH LAW
21.1 ADA shall observe and comply with all applicable laws, ordinances,
codes and regulations of governmental agencies, including federal,
provincial, municipal and local governing bodies having jurisdiction
over the Work or any part thereof. All work performed by ADA must be in
accordance with such laws, ordinances, codes and regulations.
ARTICLE 22 - PUBLICITY RELEASE
22.1 The parties understand and agree that they may not use each other's
name in any advertising or promotional material or publicity release
relating to the Work to be performed by the other hereunder without the
prior written consent of the other and that no publicity release of the
Work shall be made except with the prior written consent of both
parties, such consent not to be unreasonably withheld or delayed.
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ARTICLE 23 - CONFIDENTIAL INFORMATION
23.1 All technical and commercial information, documentation and know-how of
every kind and description ("Information") supplied whether before or
after execution of this Master Agreement, other information related
thereto acquired or developed by either party in connection with this
Master Agreement or any Development Agreement, subject to what is
hereinafter provided, shall be confidential and the exclusive property
of the disclosing party, and the receiving party shall treat and
protect such Information as proprietary and confidential information,
shall not reproduce or divulge said Information in whole or in part to
third parties except as may be required for the performance of its
obligations under this Agreement, provided such third parties agree in
writing prior to such disclosure to keep such Information confidential
upon the same terms as herein contained. The parties shall return each
others Information and all copies thereof forthwith upon its request.
This confidentiality obligation shall survive termination or expiry of
the Development Agreement.
23.2 Notwithstanding the foregoing, ADA shall not be liable for disclosure
of the Information if:
(a) the Information enters the public domain other than through a
breach of the Development Agreement;
(b) the Information is lawfully obtained by ADA from a third party
without breach of the Development Agreement by ADA;
(c) Nortel has provided its prior express written approval for such
disclosure by ADA;
(d) the Information was known to ADA prior to the commencement of the
Development Agreement and so documented;
(e) was independently developed by employees or consultants of the
receiving party without access to such Information; or
(f) is required to be disclosed to governmental agencies in order to
complete Work, or disclosure is otherwise required by law, regulation
or governmental or court order.
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ARTICLE 24 - PATENTS AND INFORMATION
24.1 ADA agrees that it will not knowingly incorporate anything in the Work
which involves the use of a trade secret or proprietary information of
any third party without the prior written approval of Nortel, such
approval not to be unreasonably withheld.
24.2 ADA shall, at its expense, timely defend any suit instituted against
Nortel and indemnify Nortel against any award of damages and costs made
against Nortel in any suit insofar as such is based on a claim that the
use of the Work or Deliverables, or the manufacture, lease, sale or
sublicensing of same infringes any patent, copyright, or other
industrial or intellectual property right, in the United States,
Canada, any member country of the European Economic Community, or
Japan, except to the extent the claim is based on (i) ADA's compliance
with or use of designs, requirement specifications, or alterations
supplied, developed or requested by Nortel, and the infringement is
necessitated by such compliance or (ii) infringement is caused by the
use of with another product in combination with the Deliverables or
Work whose use with the Deliverables or Work was not otherwise intended
or reasonably foreseen by the ADA based on the information available to
it or (iii) the Work or Deliverables are altered and the infringement
results from that alteration. Provided Nortel gives ADA timely notice
in writing of the institution of suit and permits ADA to defend same
and provides, at ADA's request and expense, all available information,
assistance and authority to so defend such suit and any appeals. ADA
shall have sole control of the defense of any such claim or suit
including appeals and of all the negotiations for settlement, including
the right to effect the settlement or compromise thereof. If any
element of the Work or Deliverables is in any suit held to constitute
an infringement and its use is enjoined, ADA may at its option and
expense:
(a) procure for Nortel and any Nortel Customer the right to continue
using such infringing element; or
(b) replace or modify the same so that it becomes non-infringing,
provided, however, the essential attributes of the element remain the
same.
(c) Where after exercising all reasonable efforts to obtain the rights
set out in a) or b) above, neither alternative is possible, ADA shall
refund all of the monies paid by Nortel pursuant to the Development
Agreement which has given rise to the infringement.
24.3 The indemnity set out in Section 24.2 shall only be extended to
countries other than those set forth therein upon mutual agreement of
the parties with respect to any specific Work or Deliverable.
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<PAGE> 25
ARTICLE 25 - WARRANTY AND LIABILITY
25.1 ADA warrants that, upon Acceptance by Nortel, each Deliverable will be
of good quality and workmanship and will meet the specifications set
out in the Work Schedule for a period of twelve (12) months or such
greater period as may be specified in the Work Schedule and that the
"design life" of each Hardware Deliverable will meet or exceed the
design life specified for that Deliverable, if any, in the Work
Schedule. If any Deliverable does not conform with such warranty, ADA
will remedy the deficiencies so that the Deliverable conforms to the
specifications set out in the Work Schedule.
25.2 Under Firm Price contracts, the cost of the warranty coverage referred
to in this Article will be borne by ADA; under Time & Materials
contracts, such costs shall be charged to Nortel on a Time & Materials
basis. In the event that neither of these methods of payment applies,
the parties will address the cost of warranty coverage in the
individual Technical Proposals.
25.3 ADA warrants that the personnel performing the Work will be qualified
and capable of performing the Work.
25.4 (a) The foregoing warranty for Deliverables will not apply to, and ADA
will have no obligation or liability whatsoever in respect of, defects
or damage caused by unauthorized use, misuse, accident, external cause,
installation error (except where installed by or on behalf of ADA) or
normal wear and tear. All of the foregoing warranties and remedies are
in lieu of all other warranties and remedies.
(b) Unless specifically defined otherwise ADA does not give and will
not be liable for any warranties, representations, or guarantees of any
kind, either express or implied by law or custom, regarding any
products derived from or based on the Deliverables (hereinafter called
the "Products") or the performance of the Products or their usefulness,
including those regarding fitness for purpose, merchantability,
condition, design, title, infringement of third party rights, or
conformance with sample.
(c) In no event will ADA be liable to Nortel or to any other party for
damages, including but not restricted to, damages for lost profits,
lost savings, or punitive, exemplary, incidental, consequential or
special damages in respect of the Products, even if ADA has advance
knowledge of the possibility of such potential loss or damage and even
if caused by ADA's negligence. If, despite the foregoing limitations,
for any reason ADA becomes liable to Nortel for damages incurred by
Nortel in connection with any of the Products, then, the liability of
ADA will be limited to an amount equal to the price paid by Nortel to
ADA for the Development Agreement that gives rise to the claim for
damages.
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<PAGE> 26
ARTICLE 26 - SPONSORS AND PRIMES
26.1 Nortel will appoint a Prime (hereinafter called the "Nortel Prime") and
ADA will appoint a prime (hereinafter called the "ADA Prime") for each
Development Agreement (collectively the "Primes"). The address of the
applicable Primes will be identified in the Work Schedule of the
applicable Development Agreement.
ARTICLE 27 - NOTICES
27.1 All communications in writing between Nortel and ADA related to a
specific Development Agreement shall be deemed to have been received by
the addressee if delivered to the appropriate Primes or if sent by
courier or facsimile transmission addressed to the appropriate Prime at
the address provided in the Work Schedule or such other address for the
Prime as have been designed in writing by either party to the other.
27.2 All communications in writing between the parties hereto of a general
nature and not related solely to a single Development Agreement for
Work shall be deemed to have been received by the addressee if sent by
courier or facsimile transmission addressed as follows:
If to Nortel:
Northern Telecom Limited
NSM Division
150-13575 Commerce Parkway
Richmond, British Columbia
Canada V6V2L1
Fax: (604) 244-4080
Attn: General Manager
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<PAGE> 27
With a copy to:
Northern Telecom Limited
6200 Kenway Drive
Mississauga, Ontario
Canada LST2N3
Fax: (905) 238-7716
Attention: Deputy Vice President and General Counsel
If to ADA:
Applied Digital Access, Inc.
9855 Scranton Road
San Diego, California 92121
Fax:
(619) 623-2208
Attention: President
With a copy to:
ADA Canada, Inc.
8999 Nelson Way
Burnaby, British Columbia
Fax: (604) 293-6100
Attention: President
27.3 Invoices shall be sent to the address indicated for Nortel above, for
the attention of Accounts Payable.
27.4 All notices given hereunder shall be given in writing and delivered or
faxed. Such notice shall be deemed to have been received upon delivery.
ARTICLE 28 - APPLICABLE LAW
28.1 This Master Agreement and all Development Agreements formed hereunder
shall be governed and construed in accordance with the laws of the
Province of British Columbia.
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<PAGE> 28
ARTICLE 29 - CONTINUING OBLIGATIONS
29.1 The provisions of Articles 18 - Inventions and Improvements, 21 -
Compliance with Law, 22 - Publicity Release, 23 - Confidential
Information, 24 - Patents and Information and 25 - Warranty and
Liability shall survive the termination of this Master Agreement and
any Development Agreement formed hereunder.
ARTICLE 30 - WAIVERS
30.1 The waiver by either party hereto of any breach of any term of this
Master Agreement or any Development Agreement formed hereunder shall
not prevent the subsequent enforcement of that term and shall not be
deemed a waiver of any subsequent breach.
ARTICLE 31 - TERM OF AGREEMENT
31.1 This Master Agreement shall commence upon execution by both parties
hereto, and shall continue until terminated by either party upon ninety
(90) days' advance notice in writing. Termination of this Master
Agreement will not affect the status of any Development Agreement
formed hereunder or work performed in pursuance thereof.
ARTICLE 32 - ENTIRETY OF CONTRACT
32.1 The preceding articles of this Master Agreement and the Work Schedule
issued and acknowledged pursuant to Article 2 hereof contain the entire
Development Agreement between the parties with respect to the Work
described in the Work Schedule. All previous proposals and
communications relative to such Work, oral or written, will be
superseded by this Master Agreement and the Work Schedule except to the
extent that they have been expressly incorporated in the Development
Agreement. Notwithstanding the fact that the Prior Agreement has been
formally assigned to ADA (or its subsidiary), the parties agree that in
the event of any inconsistency between (a) the Prior Agreement (or any
business agreement or other document assigned contemporaneously to ADA
or any subsidiary) and (b) this Agreement or the License Agreement
between Nortel and ADA (the "New License Agreement"), the terms of this
Agreement and the New License Agreement shall control.
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<PAGE> 29
ARTICLE 33 - APPENDICES
33.1 The following appendices are attached to this Master Agreement and are
deemed to form a part hereof:
A - ADA Rates;
B - Non-Binding Forecast; and
C - Firm Forecast.
ARTICLE 34 - FORCE MAJEURE
34.1 Neither party to this Agreement shall be liable for its failure to
perform any of its obligations hereunder during any period in which
such performance is prevented by any cause beyond its reasonable
control. In the event of any such delay the date of delivery or
performance hereunder shall be extended by a period equal to the time
lost by reason of such delay.
ARTICLE 35 - ARBITRATION
35.1 All disputes arising out of or in connection with this Master Agreement
shall be referred to and finally resolved by arbitration under the
rules of the British Columbia International Commercial Arbitration
Centre, in respect of which:
(a) the appointing authority shall be the British Columbia
International Commercial Arbitration Centre;
(b) the arbitration shall be conducted by a single arbitrator unless
the parties agree otherwise;
(c) the case shall be administered by the British Columbia
International Commercial Arbitration Centre in accordance with its
"Procedures for Cases under the BCICAC Rules"; and
(d) the place of arbitration shall be Vancouver, British Columbia,
Canada.
The prevailing party in any arbitration or legal action arising out of
or related to this Master Agreement shall be entitled, in addition to
any other rights and remedies it may have, to reimbursement for its
expenses incurred in such arbitration or action, including court costs
and reasonable legal fees.
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<PAGE> 30
ARTICLE 36 - AMENDMENT
36.1 No amendment, modification, supplement or other purported alteration of
this Master Agreement shall be binding upon the parties unless it is in
writing and is signed on behalf of both parties by their duly
authorized representatives.
ARTICLE 37 - WITHHOLDING
37.1 ADA believes that neither this Agreement (or any term hereof) nor the
performance of or exercise of rights under this Agreement requires tax
withholding under any law or regulations promulgated by any
organization, province, group of provinces, or political or
governmental entity located within Canada. Nortel agrees not to
withhold any amounts payable to ADA, without the written consent of
ADA, unless Revenue Canada has made a specific determination or
assessment that such amounts must be withheld. ADA agrees to indemnify
and hold harmless Nortel in respect of any amounts, including without
limitation, withholding taxes, penalties and interest, that Revenue
Canada may determine Nortel failed to properly withhold pursuant to
this Agreement.
IN WITNESS WHEREOF the parties have executed this Master Agreement as
of the day and year first above written
NORTHERN TELECOM LIMITED
Per:_____________________________________
Per:_____________________________________
APPLIED DIGITAL ACCESS, INC.
Per:_____________________________________
Per:_____________________________________
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<PAGE> 31
APPENDIX A TO MASTER AGREEMENT
ADA RATES
The price of ADA engineering services for the purposes of this Agreement will be
computed as follows:
***
***
***
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 32
APPENDIX B TO MASTER AGREEMENT
NON-BINDING FORECAST
APPENDIX B - PAGE 1
****
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 33
APPENDIX C TO MASTER AGREEMENT
FIRM FORECAST
APPENDIX C - PAGE 1
****
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 1
EXHIBIT 10.3
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of the 16th
day of July, 1996, by and between Applied Digital Access, Inc., a California
corporation (the "Company") and MPR Teltech, Ltd., a corporation organized under
the laws of British Columbia and Canada ("MPR").
WHEREAS, the Company and MPR are contemporaneously entering into that
certain Asset Purchase Agreement dated the date hereof (the "Asset Purchase
Agreement") pursuant to which MPR has agreed to sell and the Company has agreed
to buy certain assets of MPR (the "Transferred Assets").
WHEREAS, the Company has agreed to issue to MPR and MPR has agreed to
acquire shares of the Company's Common Stock in partial consideration of the
purchase price of the assets acquired pursuant to the Asset Purchase Agreement.
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Shares.
1.1 Sale and Issuance of Shares. Subject to the terms and
conditions of this Agreement and the Asset Purchase Agreement, MPR agrees to
transfer certain assets (the "Transferred Assets") pursuant to the Asset
Purchase Agreement to the Company at the Closing and the Company agrees to sell
and issue to MPR at the Closing 150,000 shares of the Company's Common Stock
(the "Shares"). The sale of the Shares will not be registered under the U. S.
Securities and Exchange Act of 1933, as amended, (the "Securities Act") but are
being issued in reliance on Regulation S under the Securities Act.
1.2 Closing. The closing for the purchase and sale of the
Shares shall take place at the corporate offices of MPR, 8999 Nelson Way,
Burnaby, British Columbia, on the date of this Agreement, or at such other time
and place as the Company and MPR mutually agree upon orally or in writing (which
shall be designated as the "Closing"). At the Closing, the Company shall deliver
to MPR a certificate representing the Shares (free and clear of all liens,
claims and other encumbrances except as otherwise provided herein). In
consideration of such delivery, MPR shall make payment for the Shares by
delivery to the Company of a bill of sale for the Transferred Assets.
2. Representations and Warranties of the Company. The Company
hereby represents and warrants to MPR that:
2.1 Organization, Good Standing and Qualification. The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure so to qualify would be
reasonably expected to have a material adverse effect on the business,
operations, properties, assets,
<PAGE> 2
prospects or condition (financial or otherwise) of the Company, taken as a whole
(a "Material Adverse Effect"). Except as disclosed in the SEC Filings (as
defined herein) and as contemplated in the Asset Purchase Agreement, the Company
has no subsidiaries.
2.2 Authorization. The Company has all requisite corporate
power and authority (i) to execute, deliver and perform its obligations under
this Agreement; (ii) to issue the Shares in the manner and for the purpose
contemplated by this Agreement, and (iii) to execute, deliver and perform its
obligations under all other agreements and instruments executed and delivered by
it pursuant to or in connection with this Agreement. All corporate action on the
part of the Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder and thereunder and the authorization,
issuance and delivery of the Shares to be sold hereunder has been taken or will
be taken prior to the Closing, and this Agreement constitutes a valid and
legally binding obligation of the Company, enforceable in accordance with its
terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief or other
equitable remedies.
2.3 Valid Issuance of Shares. The Shares which are being
purchased hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, will be duly and validly
issued, fully paid and nonassessable and, based in part upon the representations
of MPR in this Agreement, the Shares will be issued in compliance with all
applicable United States federal and state securities laws.
2.4 SEC Reports. The Company has heretofore filed with the
Securities and Exchange Commission (the "SEC") pursuant to the Securities Act
and the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), an
Annual Report on Form 10-K for the year ended December 31, 1995, a Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996 and a Current Report on
Form 8-K dated March 15, 1996, as amended (collectively, the "SEC Filings").
None of the SEC Filings contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements made, at the time and in light of the circumstances
under which they were made, not misleading. Since December 31, 1995, the Company
has timely filed with the SEC all SEC Filings and all such SEC Filings complied
with all applicable requirements of the Securities Act and the Exchange Act, as
applicable and the rules thereunder. The audited financial statements of the
Company included or incorporated by reference in the SEC Filings and the
unaudited financial statements contained in the SEC Filings each have been
prepared in accordance with such acts and rules and with United States generally
accepted accounting principles applied on a consistent basis throughout the
periods indicated therein and with each other, except as may be indicated
therein or in the notes thereto and except that the unaudited interim financial
statements may not contain all footnotes and adjustments required by United
States generally accepted accounting principles, and fairly present the
financial condition of the Company as of the dates thereof and the results of
its operations and statements of cash flows for the periods then ended, subject,
in the case of unaudited interim financial statements, to normal year-end
adjustments.
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<PAGE> 3
Except as reflected in such financial statements, the Company has no material
liabilities, absolute or contingent, other than ordinary course liabilities
incurred since the date of the last such financial statements in connection with
the conduct of the business of the Company."
2.5 Compliance with Other Instruments. The execution, delivery
and performance of this Agreement and of the transactions contemplated hereby
will not result in any violation of or constitute, with or without the passage
of time and the giving of notice, either a default under any provision of its
Articles of Incorporation or Bylaws or of any material agreement or instrument
to which the Company is a party or by which the Company is bound, or any
judgment, decree, order, law, statute, rule or regulation applicable to the
Company. No party to any material contract included as an exhibit to the SEC
Filings (or incorporated by reference therein) would be authorized or permitted
to terminate its obligations thereunder by reason of the execution and delivery
of this Agreement or any of the transactions contemplated herein.
2.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any United States federal, state or local governmental authority is
required on the part of the Company in connection with the Company's valid
execution, delivery and performance of this Agreement, except for any filings
under any applicable United States state or foreign securities laws. The filings
under United States state securities laws, if any, will be effected by the
Company at its cost within the applicable stipulated statutory period.
2.7 Litigation. There is no action, suit, proceeding or
investigation pending or currently threatened against the Company which
questions the validity of this Agreement, or the right of the Company to enter
into such instruments or to consummate the transactions contemplated hereby or
thereby.
2.8 No Material Adverse Change. Since March 31, 1996, there
has not been, occurred or arisen any change in or event affecting the Company or
its business that has had or may reasonably be expected to have a material
adverse effect on the Company or its business.
2.9 Property. The Company has good and marketable title to, or
other right to use, all property (whether real or personal, tangible or
intangible) material to the business of the Company.
2.10 Compliance With Law. The Company is organized and has
conducted its business in accordance with applicable law and is in compliance
with all such laws the violation of which might have a material adverse effect
on that business.
2.11 Representations as to Certain Matters Relating to the
Shares.
(i) The Company understands that the Shares have not been
and will not be registered under the Securities Act or any applicable state
securities laws and may only be offered or sold pursuant to registration under
the Securities Act and applicable state securities laws or available exemptions
therefrom, and that MPR is relying upon the truth and accuracy of
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<PAGE> 4
the representations, warranties, agreements, acknowledgements and understandings
of the Company set forth herein in order to determine the applicability of such
exemptions.
(ii) To the Company's knowledge, MPR is not an Affiliate (as
defined in Rule 405 promulgated by the SEC) of the Company.
(iii) No offer of the Shares was made to MPR in the United
States.
(iv) None of the Company or its subsidiaries or Affiliates,
nor any person or entity acting on behalf of the Company or any subsidiaries or
Affiliates has engaged, or will engage, in any Directed Selling Efforts (as
defined in Regulation S) with respect to the Shares; and the Company and its
subsidiaries and Affiliates have complied, and will comply, with the offering
restrictions, and any other requirements, of Regulation S with respect to the
Shares.
(v) The transactions contemplated by this Agreement:
1. have not been pre-arranged with a purchaser who is
located in the United States or is a U.S. Person; and
2. are not part of a plan or scheme to evade the
registration provisions of the Securities Act.
3. Representations and Warranties of MPR. MPR hereby represents and
warrants that:
3.1 Organization, Good Standing and Qualification". MPR is a
corporation duly organized, validly existing and in good standing under the laws
of British Columbia and Canada, and has all requisite corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted.
3.2 Authorization. MPR has all requisite corporate power and
authority (i) to execute, deliver and perform its obligations under this
Agreement; and (ii) to execute, deliver and perform its obligations under all
other agreements and instruments executed and delivered by it pursuant to or in
connection with this Agreement. All corporate action on the part of MPR, its
officers, directors and shareholders necessary for the authorization, execution
and delivery of this Agreement and the performance of all obligations of MPR
hereunder has been taken or will be taken prior to the Closing, and this
Agreement constitutes a valid and legally binding obligation of MPR, enforceable
in accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally and (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies.
3.3 Investment Experience. MPR acknowledges that it is able to
bear the economic risk of its investment and has such knowledge and experience
in financial or business matters that it is capable of evaluating the merits and
risks of the investment in the Shares. MPR
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<PAGE> 5
also represents that it has not been organized for the purpose of acquiring the
Shares.
3.4 Representations as to Certain Matters Relating to the Shares.
(i) MPR understands that no U. S. or Canadian, federal or state
agency has passed on or made any recommendation or endorsement of the Shares.
(ii) MPR acknowledges that, in making the decision to purchase
the Shares, it has relied solely upon independent investigations made by it and
not upon any representations made by the Company (other than as expressly made
in this Agreement) with respect to the Company or the Shares.
(iii) MPR understands that the Shares have not been and will not
be registered under the Securities Act or any applicable state securities laws
and may only be offered or sold pursuant to registration under the Securities
Act and applicable state securities laws or available exemptions therefrom, and
that the Company is relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgements and understandings of MPR set forth
herein in order to determine the applicability of such exemptions and the
suitability of MPR to acquire the Shares.
(iv) MPR is not a U.S. Person (as defined in Regulation S
promulgated by the SEC) and is not to its knowledge an Affiliate (as defined in
Rule 405 promulgated by the SEC) of the Company.
(v) No offer of the Shares was made to MPR in the United
States.
(vi) MPR is a Canadian company, whose head office is in Canada
and all its officers and directors reside in Canada. The decision to purchase
the Shares was made by MPR officials in Vancouver, British Columbia.
(vii) None of MPR or its subsidiaries, the MPR Affiliates
(hereinafter defined), nor any person or entity acting on behalf of MPR or any
subsidiaries or MPR Affiliates has engaged, or will engage, in any Directed
Selling Efforts (as defined in Regulation S) with respect to the Shares; and MPR
and its subsidiaries and the MPR Affiliates have complied, and will comply, with
the offering restrictions, and any other requirements, of Regulation S with
respect to the Shares.
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<PAGE> 6
(viii) MPR:
1. will not, during the period commencing on the Closing
and ending on the day forty (40) days after the Closing (the "Initial
Restricted Period"), offer or sell the Shares in the United States, to
a U.S. Person (as defined in Regulation S) or for the account or
benefit of a U.S. Person or other than in accordance with Rule 903 or
Rule 904 of Regulation S; pursuant to registration of the Shares under
the Securities Act; or pursuant to an available exemption from the
registration requirements of the Securities Act; and
2. will, after the expiration of the Initial Restricted
Period, offer, sell, pledge or otherwise transfer the Shares only
pursuant to registration under the Securities Act or an available
exemption therefrom and, in any case, in accordance with any applicable
state securities laws.
(ix) The transactions contemplated by this Agreement:
1. have not been pre-arranged with a purchaser who is
located in the United States or is a U.S. Person; and
2. are not part of a plan or scheme to evade the
registration provisions of the Securities Act.
(x) MPR is purchasing the Shares for its own account for the
purpose of investment and not (A) with a view to, or for sale in connection
with, any distribution thereof or (B) for the account or on behalf of any U.S.
Person. MPR has no contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participations to such person or to any third
person, with respect to any of the Shares.
3.5 Further Limitations on Disposition. Without in any way
limiting the representations set forth above, MPR further agrees not to make any
disposition of all or any portion of the Shares during the Initial Restricted
Period. After the Initial Restricted Period and after any additional period
required under Section 4.1, MPR agrees not to make any disposition of all or any
portion of the Shares unless MPR shall have furnished the Company with an
opinion of counsel, in form and substance reasonably satisfactory to the
Company, that such disposition will not require registration of such shares
under the Securities Act.
3.6 Legends. It is understood that the certificates evidencing
the Shares may bear one or all of the following legends:
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<PAGE> 7
(a) "The shares represented by this certificate have not
been registered under the Securities Act of 1933, as amended (the "Act") and
have been sold in reliance on the exemption from registration provided by
Regulation S under the Act ("Regulation S"). During the forty (40) day period
after the date of original issuance (the "Initial Restricted Period"), the
shares represented by this Certificate may not be offered or sold directly or
indirectly, within the United States (as defined in Regulation S), to a U. S.
Person (as defined in Regulation S) or for the account or benefit of a U. S.
Person. The preceding sentence shall have no further effect subsequent to the
expiration of the Initial Restricted Period and thereafter this legend set forth
in this paragraph may be removed upon presentation of this Certificate to the
Transfer Agent of Applied Digital Access, Inc."
(b) "These securities are subject to certain additional
transfer restrictions contained in a certain Stock Purchase Agreement dated July
15, 1996 as amended from time to time, a copy of which may be obtained from the
corporation without charge."
To the extent that such legends are no longer
applicable, the Company shall cause its transfer agent to remove the legends
upon request by MPR.
3.7 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority is required on
the part of MPR in connection with MPR's valid execution, delivery and
performance of this Agreement or the issuance of the Shares, except for (a) any
filings under any applicable United States state securities laws or (b) any
notification required by the Canadian Ministry of Finance regarding MPR's
execution, delivery and performance of this Agreement, which notice shall have
been given by MPR prior to the Closing.
4. Covenants of the Parties.
4.1 Additional Transfer Restriction. Notwithstanding the
expiration of the Initial Restricted Period or any rights to Sell earlier which
may exist under the United States federal securities laws, MPR hereby agrees
that without the prior written consent of the Company (which may be withheld in
the Company's sole discretion), neither MPR nor any MPR Affiliate (as
hereinafter defined) shall, directly or indirectly sell, offer to sell, contract
to sell (including, without limitation, any short sale), grant any option to
purchase or otherwise transfer or dispose of (collectively, "Sell") (other than
to donees who agree to be similarly bound) any of the Shares, until twelve (12)
months following the date of this Agreement. Thereafter, this Section 4.1
shall not restrict MPR from Selling up to one-half (1/2) of the Shares.
Following the date which is twenty-four (24) months following the date of this
Agreement, this Section 4.1 shall not restrict MPR from Selling up all of the
Shares. Notwithstanding the foregoing, transfers solely among MPR Affiliates
shall not be subject to the transfer restrictions set forth in this Section 4.1
provided the MPR Affiliate transferee agrees in writing to be bound by this
Section 4.1 and any requirements of Regulation S. In order
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<PAGE> 8
to enforce the foregoing covenant, the Company may impose legends and/or
stop-transfer instructions with respect to the Shares held by MPR or any MPR
Affiliate (and the Shares of every other person subject to the foregoing
restriction). For the purposes of this Agreement "MPR Affiliate" shall mean BC
TELECOM, INC. or any subsidiary of BC TELECOM, INC.
4.2 Standstill Provisions. Commencing as of the Closing, so long
as MPR owns at least 50,000 shares of Common Stock, MPR (including all MPR
Affiliates) shall not acquire beneficial ownership of any shares of Common
Stock, any securities convertible into or exchangeable for Common Stock, or any
other right to acquire Common Stock, except by way of stock dividends or other
distributions or offerings made available to holders of Common Stock generally,
from the Company or any other person or entity, without the prior written
consent of the Company, which consent may be withheld in its sole discretion;
provided, however, that in no event shall (i) the original purchase of
securities pursuant to this Agreement including Section 1.1 or (ii) the
acquisition by MPR of another company that then owns securities of the Company,
cause a violation of this Section 4.2.
5. Miscellaneous.
5.1 Survival of Warranties. The warranties, representations and
covenants of the Company and MPR contained in or made pursuant to this Agreement
shall survive the execution and delivery of this Agreement and the Closing and
shall in no way be affected by any investigation of the subject matter thereof
made by or on behalf of MPR or the Company.
5.2 Successors and Assigns. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any of the Shares sold hereunder), provided, however, MPR's
rights and obligations under Section 1.1 of this Agreement shall not be
assignable. Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations, or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement.
5.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
5.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.5 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.6 Notices. Unless otherwise provided, any notice required or
permitted
-8-
<PAGE> 9
under this Agreement shall be given in writing by personal delivery to
the party to be notified or by Federal Express or other overnight package
delivery service or registered or certified mail, postage prepaid and addressed
to the party to be notified at the following addresses, or at such other address
as such party may designate by five (5) days' advance written notice to the
other parties (with notice deemed given upon receipt):
If to the Company:
Applied Digital Access, Inc.
9855 Scranton Road
San Diego, California 92121
Attn: President
If to MPR:
MPR Teltech Ltd.
8999 Nelson Way
Burnaby, B. C.
Canada VSA 4B5
Attn: President
5.7 Finder's Fee. Each party represents that it neither is nor
will be obligated for any finders' fee or commission in connection with this
transaction. Each party agrees to indemnify and to hold harmless the other from
any liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the indemnifying party or any of its officers, partners,
employees, or representatives is responsible.
5.8 Expenses. Irrespective of whether the Closing is effected,
each party shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement.
Notwithstanding the foregoing, the Company shall pay any and all stamp, transfer
and other similar taxes payable or determined to be payable in connection with
the execution and delivery of this Agreement or the original issuance of the
Shares and shall save and hold MPR harmless from and against any and all
liabilities with respect to or resulting from any delay in paying, or omission
to pay, such taxes.
5.9 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and MPR. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each holder of any securities purchased under this Agreement at the time
outstanding, each future holder of all such securities, and the Company.
5.10 Severability. If one or more provisions of this Agreement are
held to be
-9-
<PAGE> 10
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
5.11 Entire Agreement. This Agreement and the documents referred
to herein constitute the entire agreement among the parties and no party shall
be liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or
therein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
MPR: THE COMPANY:
MPR TELTECH, LTD. APPLIED DIGITAL ACCESS INC.,
a California corporation
By: __________________________ By: _____________________________________
Title: _______________________ Title: __________________________________
[SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]
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<PAGE> 1
CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.8(b), 200.83 AND
230.406 * INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL
TREATMENT REQUEST THAT IS FILED SEPARATELY WITH THE COMMISSION
EXHIBIT 10.4
LICENSE AGREEMENT
MEMORANDUM OF AGREEMENT made and entered into as of the 16th day
of July, 1996 ("Effective Date").
BY AND BETWEEN: NORTHERN TELECOM LIMITED, a corporation duly incorporated under
the laws of Canada, having an office at 2920 Matheson Boulevard East,
Mississauga, Ontario, Canada UW 4M7, on behalf of itself and its Subsidiaries
and Affiliates
(hereinafter called "Northern Telecom")
AND: APPLIED DIGITAL ACCESS, INC.
a corporation duly incorporated under the laws of California and
having an office at
9855 Scranton Road, San Diego, California,
U.S.A. 92121
(hereinafter called the "Licensee")
WHEREAS Northern Telecom designs, produces and markets telecommunications
systems and is in possession of certain proprietary rights in the technology
related to such systems;
WHEREAS Licensee wishes to design, produce and market certain products or
software programs based upon certain technology of Northern Telecom; and
WHEREAS each Party is prepared to grant such licenses and enter into such
obligations, as hereinafter set forth.
NOW THEREFORE THIS AGREEMENT WITNESSETH THAT, IN CONSIDERATION OF THE MUTUAL
PROMISES HEREINAFTER SET FORTH, THE PARTIES AGREE AS FOLLOWS:
<PAGE> 2
ARTICLE 1
DEFINITIONS
As used herein, unless otherwise defined:
(a) "Affiliate" shall mean a corporation or company which a Party
hereto effectively controls, directly or indirectly, other than a Subsidiary,
through the ownership or control of shares in the corporation or company;
(b) "Authorized Products" shall mean all products which are developed
by Licensee pursuant to the licenses granted in this Agreement within the
"performance and fault management" domains as defined by the International
Telecommunications Union Telecommunication Management Network Standards Series
X.700;
(c) "Copyrights" shall mean all copyrights owned or controlled by
Northern Telecom or its Subsidiaries or Affiliates in existence at any time in
any or all countries of the world and first existing prior to or during the term
of this Agreement;
(d) "Enhancements" shall mean any minor extensions of the features
and/or capabilities which are contained in the Licensed Information as it exists
as of the Effective Date of this Agreement;
(e) "Gross Sales" shall mean the proceeds paid to Licensee upon the
sublicensing of Authorized Products or of Licensed Information, as well as
engineering and installation related thereto, whether comprising a lump sum
and/or periodic payments; provided that Gross Sales shall not include (i)
separately itemized taxes, support service or maintenance fees, insurance,
interest charges on financing provided by Licensee to its customers and
transportation costs, actually paid by Licensee's customers; or (ii) any refunds
for returns.
(f) "Intellectual Property" shall mean the aggregate of Patents,
Copyrights and Maskworks, trade secrets and know-how which relates in any way to
Licensed Information and Authorized Products;
(g) "Joint Venture" shall mean a joint venture company which is a
cooperative business enterprise formed between Northern Telecom and other
autonomous entities to address more effectively certain mutual business
interests and opportunities.
(h) "Licensed Information" shall mean those items of information set
forth in Schedule "A" attached hereto and forming part hereof and all source
code, object code, design documentation, Northern Telecom's customer product
documentation (including training and operations), installation and maintenance
documentation marketing materials developed for general use, test
specifications, Northern Telecom proprietary utilities and tools, command files
for software development and testing, and everything currently used by Northern
Telecom at the Effective Date to develop, modify and enhance the Licensed
Information to the extent available in accordance with Article 3 hereof.
<PAGE> 3
(i) "Manufacturing Licensee" shall mean a third party entity which has
entered into an agreement with Northern Telecom to manufacture, in modified or
unmodified form, Northern Telecom products and directly or indirectly through
distributors, to sublicense and distribute Northern Telecom products under
Northern Telecom or the Manufacturing Licensee's own brand name.
(j) "Maskworks" shall mean all rights in semiconductor topology owned
or controlled by Northern Telecom or its Subsidiaries or Affiliates similar to
those defined in the Semiconductor Chip Protection Act of 1984 (U.S.A.) in
existence at any time in any or all countries of the world and first existing
prior to or during the term of this Agreement;
(k) "Modifications" shall mean any minor changes such as, but not
limited to, bug fixes, to the features and/or capabilities of the Licensed
Information as it exists as of the Effective Date of this Agreement;
(1) "Patents" shall mean all patents (including utility models but
excluding design registration and design patents) owned or controlled by
Northern Telecom or its Subsidiaries or Affiliates issued at any time in any or
all countries of the world on applications having effective filing dates prior
to the expiration or termination of this Agreement, including all continuations,
continuations-in party, divisionals, reissues, additions, reexaminations and
extensions with respect to any of the foregoing;
(m) "Subsidiary" shall mean a corporation or company in which a party
hereto effectively owns or controls, and continues to own or control directly or
indirectly, more than fifty percent (50%) of the voting stock or shares;
(n) "Test Plan" shall mean the plan for testing set forth in the
documentation designated as such in Schedule "A" hereof.
<PAGE> 4
ARTICLE 2
GRANT OF RIGHTS
Northern Telecom, to the extent of its legal right so to do, hereby grants to
Licensee and its Subsidiaries and Affiliates, subject to the terms and
conditions of this Agreement, a perpetual, personal, non-transferable, exclusive
(except as set forth in this Article 2), non-assignable, indivisible, world-wide
right:
(a) to use and modify and have modified the Licensed Information, and
any Enhancements and Modifications thereto licensed hereunder, to develop
Authorized Products;
(b) to sublicense Authorized Products, except as expressly set forth
herein, pursuant to a valid sublicense agreement containing substantially the
terms set forth in Schedule "B";
(c) to grant sublicenses to the Licensed Information, in object code
version only, pursuant to a valid sublicense agreement containing substantially
the terms set forth in Schedule "B";
(d) to grant to sublicensees the right pursuant to an escrow agreement,
if the Licensee,
(i) becomes insolvent or files an assignment in bankruptcy or fails to have
dismissed any petition seeking to have it declared bankrupt within 30 days
after the filing thereof, or
(ii) after using its best efforts to support Authorized Products, ceases all
support of Authorized Products, to have access to and to use the source code
version of the Licensed Information solely for Internal use to support the
Authorized Products; and
(e) under Intellectual Property, but only to the extent necessary to enable the
exercise of the rights granted in the immediately preceding sub-paragraphs.
The aforesaid rights shall include the right to communicate to customers
purchasing the Authorized Products permitted hereunder such portions of the
Licensed Information as are reasonably needed by such customers for the use of
the Authorized Products; provided, however, that, to the extent that proprietary
information is being communicated, the recipients of the Licensed Information be
advised by Licensee in writing at the time, or before such communication, that
proprietary information is being communicated and that such information is to be
kept confidential and not used except as expressly permitted in writing and
provided that such recipients undertake such obligations of confidentiality and
restricted use in writing.
For greater certainty, Licensee shall have no right to use the Licensed
Information other than to develop Authorized Products and as set forth in the
immediately preceding paragraph. Nothing herein shall limit Northern Telecom's
right to grant licenses in the Licensed Information for activities other than
those for which the Licensee is granted an exclusive license hereunder.
For greater certainty, the exclusive rights granted hereunder shall not
prejudice Northern Telecom's patent cross-licensees or any others granted rights
in Intellectual Property which licenses do not include rights in the Licensed
Information.
Licensee shall comply with all applicable governmental legislation or
regulations imposing restrictions on the export of products.
<PAGE> 5
Notwithstanding anything in this Article 2, the grant of rights contained in
this Article shall be non-exclusive with respect to:
(a) any Manufacturing Licensee or Joint Venture existing as at the date
of this Agreement;
(b) Telrad Telecommunications & Electronic Industries Ltd. and its
existing and future sublicensees only with respect to Israel and India;
(c) any existing or future Subsidiary of Northern Telecom;
(d) any end user customer of Licensed Information, which may be granted
certain rights in the event that Northern Telecom fails to support products
licensed to such licensee;
(e) BC Tel and AGT Limited, which retain rights for their own use; and
(f) any existing sublicensee of Northern Telecom or its Subsidiaries,
Affiliates, Manufacturing
Licensees or Joint Ventures for Internal use only.
Northern Telecom agrees that it shall not grant to any party, other than the
parties described in the immediately foregoing items (a) to (f), the right to
sublicense Modifications or Enhancements to any Authorized Products.
Licensee grants to Northern Telecom and its Subsidiaries, Manufacturing
Licensees and Joint Ventures a personal, non-transferable, non-assignable,
(except as provided in this Agreement) indivisible, world-wide right to use all
Enhancements and Modifications which Licensee may develop or have developed
during the term of this Agreement in connection with the use of the Licensed
Information. Northern Telecom grants to Licensee and its Subsidiaries and
Affiliates a personal, non-transferable, non-assignable, (except as provided in
this Agreement) indivisible, world-wide right to use all Enhancements and
Modifications which Northern Telecom may develop or have developed during the
term of this Agreement in connection with the use of the Licensed Information.
Within Thirty (30) days of the end of each calendar quarter, each party shall
provide the other with a copy of all Enhancements and Modifications developed
during such preceding quarter together with all applicable documentation, or, if
applicable, written notice that no new Enhancements or Modifications have been
developed during such preceding quarter.
<PAGE> 6
ARTICLE 3
FURNISHING OF LICENSED INFORMATION
Northern Telecom shall, to the extent of its legal right so to do, promptly
furnish to Licensee the Licensed Information listed in Schedule "A" hereof.
Northern Telecom shall only be obliged to provide Licensed Information available
to it or its Subsidiaries, and shall not be obligated to develop or produce,
except as expressly set forth herein, any new or unavailable Licensed
Information.
Northern Telecom shall supply the Licensed Information as soon as reasonably
possible after execution of this Agreement and receipt from Licensee of the
payment set forth in the first paragraph of Article 6 and substantially complete
such supply within ninety days therefrom.
Licensed Information provided hereunder shall be deemed delivered upon delivery
to the common carrier chosen by Northern Telecom, at the relevant facility of
Northern Telecom or upon sending by Northern Telecom if such Licensed
Information is delivered by electronic means.
That portion of the Licensed Information provided by Northern Telecom to
Licensee pursuant to a prior confidentiality or non-disclosure agreement shall
be considered provided pursuant solely to this Agreement and subject only to the
terms and conditions hereof.
<PAGE> 7
ARTICLE 4
REVIEW OF AUTHORIZED PRODUCTS BY NORTHERN TELECOM
Licensee shall advise Northern Telecom, in writing, of each new release of
Authorized Products developed during the term of this Agreement and, at Northern
Telecom's request, provide suitable prototype and commercial versions of such
Authorized Products for a period not to exceed three (3) business days solely to
allow Northern Telecom to test such products. Authorized Products shall be
resumed to Licensee. Northern Telecom shall, test the Authorized Products on
Northern Telecom's premises and at Northern Telecom's expense in accordance with
the Test Plan.
Licensee shall provide, free of charge, such reasonable assistance of its
qualified technical personnel as may be requested by Northern Telecom to assist
in carrying out such testing.
Northern Telecom shall provide to Licensee the results of such testing, and
may, in its sole discretion, provide to Licensee comments and advice thereon.
ARTICLE 5
TECHNICAL ASSISTANCE
During the term of this Agreement, Northern Telecom shall make available to
Licensee, to the extent contemplated in the immediately following paragraphs,
upon the latter's request, technical assistance to facilitate the use of the
Licensed Information provided hereunder for the exercise of the rights granted
herein.
Technical assistance provided hereunder by Northern Telecom shall be provided as
reasonably required, under Northern Telecom's standard terms and conditions,
including Northern Telecom's then-current per diem rates therefor plus expenses.
Technical assistance provided hereunder shall be limited to that which is
reasonable under the circumstances and shall be scheduled by Northern Telecom to
serve the needs of Licensee, but not so as to inconvenience, or place excessive
demands upon, the operations of Northern Telecom, or its Subsidiaries or
Affiliates. Technical assistance shall include both consulting technical
services of Northern Telecom and visits of Northern Telecom's personnel to
Licensee's facilities.
Technical assistance provided by Northern Telecom prior to the commencement of
this Agreement and related to the subject matter hereof shall be considered
provided pursuant to this Agreement and subject only to the terms and conditions
hereof.
ARTICLE 6
PAYMENT
In consideration of the rights granted hereunder, the Licensee shall pay to
Northern Telecom the following amounts:
(a) ** lump sum of ** upon execution of this Agreement;
(b) a royalty ** of the Authorized Products for the period, and in
the manner, hereinafter set forth (which royalty is herein called the "Royalty")
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 8
The Royalty shall be payable a set forth in Article 7 for a period of **
commencing on the Effective Date of this Agreement. Notwithstanding anything
in this Article 6, the Royalty shall not exceed an aggregate of **. The Royalty
shall accrue on the sublicensing of the Authorized Products and shall become
payable in accordance with the provisions hereof.
If the amount that a third party shall pay to Licensee for the Authorized
Products and associated engineering and installation cannot be determined at the
time that Licensee grants a license to such third party because such amount is
not separately identified, Licensee shall pay to Northern Telecom an amount
determined as set out below:
(i) Licensee shall establish a list price for the Authorized Product
for the particular third party customer; and
(ii) Licensee shall then determine a discount percentage to be applied
against such price based upon current market practice and the average discount
percentage applied to the previous five licenses granted to the Authorized
Product for which the licensee most closely approximates such license with
respect to the size and functionality of the system being licensed; provided
however, that such average shall include all prior licenses of the Authorized
Product, if five (5) or fewer of such prior licenses have been granted at that
time.
Northern Telecom shall not be under any obligation to transmit to Licensee any
Licensed Information or render any technical assistance whatsoever hereunder
until the payment of the lump sum provided in subparagraph (a) of this Article 6
has been made or to continue to provide Licensed Information or to provide
technical assistance unless payments of the Royalty or other amounts due related
to the Authorized Products are not overdue, unless such overdue payments relate
to a good faith payment dispute which has been continuing for not more than
thirty (30) days.
ARTICLE 7
RECORDS AND REMITTANCES
Licensee shall keep clear and accurate records with respect to the Authorized
Product and the Licensed Information. Northern Telecom shall have the right,
through its Internal auditing experts, to examine and audit, during normal
hours, annually (or at less frequent intervals) all such records and such other
records and accounts as may under recognized accounting practices contain
information bearing upon the amount of Royalties payable to it under this
Agreement. Prompt adjustment shall be made by the proper party to compensate for
any errors or omissions disclosed by such examination or audit. Neither such
right to examine and audit, nor the right to receive such adjustments, shall be
affected by statements to the contrary appearing on cheques or otherwise, unless
any such right is expressly waived by the party having such right. Licensee
shall furnish whatever additional information Northern Telecom may reasonably
prescribe from time to time to enable Northern Telecom to ascertain whether the
Authorized Product or Licensed Information sublicensed is subject to the payment
of Royalties hereunder and the amount payable thereon.
Within sixty (45) days following the end of each quarterly period ending on
March 31, June 30, September 30 or December 31, commencing with the quarterly
period which ends on September 30,1996 and continuing thereafter until all
Royalties payable hereunder shall have been reported and paid, Licensee shall
furnish to Northern Telecom a statement, in a form acceptable to Northern
Telecom, certified by an authorized official of Licensee, recording all
Authorized Products or Licensed Information sublicensed during such quarterly
period, the ** and the amount of Royalties payable thereon. If no Authorized
Products or Licensed Information have been sublicensed, that fact shall be
shown on such statement.
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 9
On the last day of each quarterly period, Licensee shall pay to Northern Telecom
the Royalty applicable to all amounts received in such quarter.
All payments to be made by Licensee to Northern Telecom shall be made in United
States Dollars at Northern Telecom's address as shown in Article 13 hereof, or
at such other address as Northern Telecom shall have specified by written
notice.
Licensee shall pay all taxes imposed as a result of the existence or operation
of this Agreement including, but not restricted to, registration fees,
remittance fees, stamp taxes, sales, value added or use imposed with respect to
the granting or transfer of rights hereunder or the payment or receipt of fees
hereunder and any tax which Licensee shall be required to withhold or deduct
from fees or other payments to Northern Telecom except any tax on income imposed
on Northern Telecom.
Payments when provided for in this Agreement shall, when overdue, bear interest
at a monthly rate of one and one-half percent (1.5%) or an annual rate of
eighteen percent (18%).
ARTICLE 8
CONFIDENTIAL INFORMATION
Any information or materials (including "Licensed Information") provided by
Northern Telecom hereunder ("Confidential Information") shall remain the
property of Northern Telecom, and the Licensee shall be authorized to use such
information or materials only within the scope of the rights and licenses herein
granted.
Except as hereinafter provided, for a period of three (3) years following the
date of termination of this Agreement, Licensee shall protect Confidential
Information provided to it by use of the same care and discretion to avoid
disclosure, publication, or dissemination of such Confidential Information, as
the case may be, beyond those employees of Licensee with a need to know such
information for the purposes of this Agreement, as the Licensee employs with
similar information of its own which it does not desire to disclose, publish or
disseminate.
Information which would otherwise be classified as Confidential Information
hereunder shall not be treated as confidential, or otherwise subject to the
restrictions and obligations set forth in this Article 8, if such information:
(a) is already in the possession of Licensee without obligation of
confidence and is so documented;
(b) is independently developed by Licensee and is so documented;
(c) is or becomes publicly available without breach of this Agreement,
including Licensed Information which is made public;
(d) is rightfully received by Licensee from a third party without
obligation of confidence; or
(e) is released for disclosure by Northern Telecom with its written
consent.
<PAGE> 10
ARTICLE 9
LIABILITY
Northern Telecom makes no representations in respect to and does not warrant
any Licensed Information furnished pursuant hereto, but shall furnish such in
good faith to the best of its knowledge and ability. Without restricting the
generality of the foregoing, Northern Telecom makes no representations or
warranties as to merchantability or fitness for a particular purpose, or as to
whether or not the use of the Licensed Information supplied hereunder may
infringe any patent or other rights of any other person.
Licensee shall indemnify and save Northern Telecom harmless from any and all
claims and liabilities for damages, losses, expenses or costs (including counsel
fees and expenses) arising out of any infringement or alleged infringement by
any modification to the Licensed Information made by or on behalf of Licensee as
well as any and all claims and liabilities arising out of any modification to
the Licensed Information made by or for Licensee.
Northern Telecom represents that to the best of its knowledge there is no
conflicting claim related to the rights granted hereunder. In the event of any
suit against Licensee or its customers for any alleged infringement of any
intellectual property right or any other right of any third party arising from
the sale or sublicense of Authorized Products by Licensee, Northern Telecom's
sole and only obligation and liability shall be to assist Licensee in defending
or otherwise dealing with such suit, at Licensee's expense, without incurring
any liability with respect to any such assistance.
In the event that either party becomes aware of any actual or suspected acts of
a third party that do or might infringe Intellectual Property rights through use
of the Licensed Technology, which infringement does or might affect any
Authorized Product (an "Infringement"), such party shall notify the other of the
Infringement and Northern Telecom may choose, but shall have no obligation, to
institute and prosecute any action or proceeding with respect to the
Infringement at the cost of Northern Telecom, and Northern Telecom shall be
entitled to any and all proceeds recovered from third parties as a result of
such enforcement. Northern Telecom agrees not to take any action inconsistent
with this Agreement in the settlement of any action.
If Northern Telecom elects not to prosecute any Infringement suit, Licensee may
do so at Licensee's own expense after notice to Licensee of that intention and
Licensee shall be entitled to any and all proceeds as a result of such
enforcement to the extent that such proceeds relate to infringement against
Authorized Products.
Licensee shall indemnify and save Northern Telecom harmless from any and all
claims and liabilities for damages, losses, expenses or costs (including counsel
fees and expenses) arising out of the furnishing or receipt of any technical
assistance pursuant hereto and hereby waives any claims that it might have or
might pretend to have against Northern Telecom, its employees and agents, as
well as those of its Subsidiaries and Affiliates, for or arising from the
provision of such assistance or information.
Notwithstanding anything else in this Article 9, Northern Telecom agrees that it
shall indemnify and save the Licensee and its Affiliates and Sublicensees
harmless with respect to any suit based on a claim that the use of the Licensed
Information or the sublicensing of the same infringes any intellectual property
right of any third party; provided that such obligation of Northern Telecom
shall apply only to the extent that Northern Telecom is indemnified by MPR
Teltech Ltd. ("MPR") pursuant to the master agreement (the "Development
Agreement") made as of December 11,1992 between MPR and Northern Telecom (as
assignee of Prism Systems Inc.) and subject to the restrictions and releases set
forth in the Development Agreement and in the DSS II development assignment
agreement made as of July 15, 1996 among MPR,
<PAGE> 11
ADA Canada, Inc., Northern Telecom and BC Telecom Inc. For greater certainty,
nothing in this paragraph shall render
Northern Telecom liable to Licensee in respect of a claim of infringement for
any amount in excess of the amount received by Northern Telecom from MPR in
respect of such claim of infringement.
ARTICLE 10
FORCE MAJEURE
Neither Party shall be in default or liable for any loss or damage resulting
from delays in performance or from failure to perform or comply with terms of
this Agreement due to any causes beyond its reasonable control during the
continuation of such causes, which causes include but are not limited to Acts of
God or the public enemy; riots and insurrections, war, accidents, fire, strikes
and other labour difficulties (whether or not the Party is in a position to
concede to such demands), embargoes, judicial action; lack of or inability to
obtain export permits or approvals, necessary labour, materials, energy,
components or machinery; acts of civil or military authorities.
ARTICLE 11
DURATION
This Agreement shall commence on the above mentioned Effective Date and
terminate (save with the exception of the survivorship provisions set forth in
the final paragraph of Article 12) upon completion of a period of three (3)
years following such date.
Following the expiry of this Agreement by the passage of time, Licensee may
continue to exercise the licenses granted pursuant to Article 2 as though this
Agreement had continued.
ARTICLE 12
TERMINATION
In the event either Party shall be in breach of this Agreement or fail to
perform one or more of its material obligations under this Agreement, the other
Party may, by written notice to the Party in default, require the remedy of the
breach or the performance of the obligation and, if the Party so notified fails
to remedy or perform within sixty (60) days of the forwarding of a notice so to
do, the other Party may, by written notice, terminate this Agreement.
In the event of an enforceable decision or directive declaring invalid an
essential part of this Agreement, without which this Agreement would not have
been entered into, this Agreement may, at the option of either Party, be
terminated upon the giving of notice to the other Party. Save as before set
forth, in the event that any term, clause, provision or condition of this
Agreement shall be similarly adjudged invalid for any reason whatsoever, such
invalidity shall not affect the validity or operation of any other term, clause,
provision or condition and such invalid term, clause, provision or condition
shall be deemed to have been deleted from this Agreement.
In the event that Licensee becomes majority owned or controlled by an entity
which is a direct competitor or Northern Telecom, Licensee shall forthwith
provide written notification to Northern Telecom of such change in majority
ownership or control. Within thirty (30) days of receipt of such change in
ownership or control, Northern Telecom may, in its sole discretion, elect to
terminate this Agreement and the licenses granted hereunder provided that the
acquiring entity is reasonably determined to be a direct competitor of Northern
Telecom.
<PAGE> 12
In the event either Party becomes involved or is the object of bankruptcy or
insolvency proceedings, or makes an assignment for the benefit of its creditors,
or is placed in receivership or liquidation, or fails to satisfy any final
judgment rendered against it within the period so permitted, then, the other
Party may, without any delay, by written notice, terminate this Agreement.
In the event of termination of this Agreement prior to the expiry of its term,
Licensee shall discontinue the exercise of the rights granted hereunder and the
use of the Licensed Information and shall pay to Northern Telecom all amounts
due hereunder.
Notwithstanding any termination hereunder, the provisions of Articles 2 and 8
related to confidentiality and non-use, and the provisions of Article 9 related
to liability shall survive the termination of this Agreement.
ARTICLE 13
NOTICES
Any and all notices or other information to be given by one of the Parties to
the other shall be deemed sufficiently given when forwarded by prepaid,
registered or certified first class air mail or by facsimile, telegram, telex or
hand delivery to the other Party at the following address:
If to Northern Telecom: Northern Telecom Limited
2920 Matheson Boulevard East
Mississauga, Ontario
Canada UW 4M7
Attention: Corporate Secretary
If to Licensee: Applied Digital Access, Inc.
9855 Scranton Road
San Diego, California
U.S.A. 92121
Attention: President
and such notices shall be deemed to have been received fifteen (15) business
days after mailing if forwarded by mail, and the following business day if
forwarded by facsimile, telegram, telex or hand.
The aforementioned address of either Party may be changed to any time by giving
fifteen (15) business days prior notice to the other Party in accordance with
the foregoing.
In the event of a generally-prevailing labour dispute or other situation which
will delay or impede the giving of notice by any such means, in either the
country of origin or of destination, the notice shall be given by such specified
mode as will be most reliable and expeditious and least affected by such dispute
or situation.
<PAGE> 13
ARTICLE 14
GENERAL PROVISIONS
Neither party may assign all or any portion of this Agreement without the other
party's prior written consent, such consent not to be unreasonably withheld.
Notwithstanding the foregoing, a party may assign and transfer this Agreement
and its rights and obligations hereunder to its parents, Affiliates or
Subsidiaries. In no event shall either party create any contractual relation
between any third party and the other.
The Parties recognize that the transfer of Licensed Information to or for a
country other than Canada or the United States of America may be subject to the
specific approval of the governments of such countries or various agencies
thereof.
Nothing in this Agreement shall be construed as requiring Northern Telecom to
disclose technical information, or to grant rights under licenses, or to render
any technical assistance, which would violate any confidentiality undertakings
which it has towards third persons or which would violate any present or future
law or decrees of any government or governmental office or agency, and nothing
contained herein shall require the disclosure of technical information which
would increase or impose any obligations on Northern Telecom with respect to
third parties.
Nothing contained in this Agreement shall be construed as:
(a) requiring Northern Telecom to file any patent application, to
secure any patent or to maintain any patent in force;
(b) constituting a warranty or representation by Northern Telecom as to
the validity or scope of any patent licensed hereunder;
(c) constituting a warranty or representation by Northern Telecom that
any use, lease, sale or sublicense by Licensee hereunder will be free from
infringement of patents, copyrights and other intellectual property rights other
than those under which, and to the extent to which, licenses are granted
hereunder;
(d) constituting an agreement to bring or prosecute actions or suits
against third parties for infringements;
(e) conferring any right to use, in advertising, publicity or
otherwise, any name, trade-name or trademark, or any contraction, abbreviation
or simulation thereof;
(f) conferring by implication, estoppel or otherwise upon Licensee any
license or other right under any patent, except the licenses and rights
expressly granted hereunder.
Except as explicitly set forth herein, nothing contained in this Agreement shall
limit, in any manner, either Party's right to discontinue or change the design
or characteristics of any of its products (including Licensed Information) at
any time without notice and without liability.
<PAGE> 14
The failure of either Party to give notice to the other Party of the breach or
non-fulfillment of any term, clause, provision or condition of this Agreement
shall not constitute a waiver thereof, nor shall the waiver of any breach or
non-fulfillment of any term, clause, provision or condition of this Agreement
constitute a waiver of any other breach or non-fulfillment of that or any other
term, clause, provision or condition of this Agreement.
All technical and other information provided or made available to Licensee prior
to the execution of this Agreement which would have been covered by the
definitions of Licensed Information or Confidential Information had it been
delivered pursuant to this Agreement shall be deemed to be Licensed Information
or Confidential Information, as the case may be, and to be subject to the
provisions of this Agreement.
This Agreement sets forth the entire agreement and understanding between the
Parties with respect to the subject matter addressed herein and supersedes and
cancels all previous negotiations, agreements, commitments, and writings in
respect to the subject matter hereof, and neither Party hereto shall be bound by
any term, clause, provision or condition save as expressly provided in this
Agreement or as duly set forth on or subsequent to the date hereof in writing,
signed by duly authorized officers of the Parties.
Nothing in this Agreement shall be construed as establishing or implying any
partnership between the Parties hereto, and nothing in this Agreement shall be
deemed to constitute either of the Parties hereto as the agent of the other
Party or authorize either Party to incur any expenses on behalf of the other
Party or to commit the other Party in any way whatsoever, without obtaining the
other Party's prior written consent.
The specific terms and conditions of this Agreement shall be held in confidence
by both Parties and only disclosed as may be agreed by both Parties, which
agreement shall not be unreasonably withheld by either Party. Notwithstanding
the foregoing, or paragraph (e) above, either Party may make public statements,
issue publicity or media releases, or make other disclosures, revealing the
existence of this Agreement, and the general relationship of the Parties
hereunder, without the prior approval of the other Party.
This Agreement shall be construed in accordance with and governed by the laws of
the Province of Ontario, Canada.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the date
first above mentioned.
NORTHERN TELECOM LIMITED APPLIED DIGITAL ACCESS, INC.
Per: ___________________ Per: ________________________
Per: ___________________ Per: ________________________
Date:___________________ Date: _______________________
<PAGE> 15
SCHEDULE "A"
LICENSED INFORMATION
<PAGE> 16
SCHEDULE "B"
SUBLICENSING TERMS
sublicense agreements shall include terms and conditions substantially similar
to the following:
1. restrict use of the Authorized Products or Licensed Information to
object code form only;
2. prohibit causing or permitting the reverse engineering, disassembly or
decompilation of the Authorized Products or Licensed Information except
to the extent permitted by law or required to obtain interoperability
with other independently created software programs;
3. prohibit title to the Authorized Products or Licensed Information from
passing to the end user;
6. disclaim Northern Telecom's liability for any damages, whether direct,
indirect, incidental or consequential arising from the use of the
Authorized Products or Licensed Information; and
7. require the end user, at the termination of the sublicense, to
discontinue use and destroy or return to Licensor the Authorized
Products or Licensed Information, associated documentation and all
archival or other copies of the Authorized Products or Licensed
Information.
8. in any sublicense to United States Government end users, include the
following on all copies of Authorized Products distributed to United
States Government end users;
This software is provided with RESTRICTED RIGHTS. Use, Duplication, or
Disclosure by the U.S. Government is subject to restrictions as set
forth in subparagraph (c) (1) (ii) of The Rights in Technical Data and
Computer Software clause at DFARS 252.227-7013 or subparagraphs (c) (1)
and (2) of the Commercial Computer Software-Restricted Rights at 48 CFR
52.227-19, or successor legislation, as applicable. Contractor/
Manufacturer is Northern Telecom Limited, 2920 Matheson Boulevard East
Mississauga, Ontario Canada L4W 4M7.
9. End user shall comply with all applicable governmental legislation or
regulations imposing restrictions on the export of products.
<PAGE> 1
EXHIBIT 10.5
SECOND AMENDMENT TO LEASE
This Second Amendment to Lease (this "Amendment"), entered into as of
August 8, 1996, by and between SORRENTO TECH ASSOCIATES, a California limited
partnership ("Landlord"), and APPLIED DIGITAL ACCESS, a California corporation
("Tenant"), modifies that certain R & D Building Lease dated as of June, 1993,
by and between Landlord and Tenant, as amended by that certain First Amendment
to Lease dated as of September 23, 1994 (collectively, the "Lease"). All
capitalized terms used in this Amendment and not defined shall have the meanings
set forth in the Lease.
The parties hereto desire that the Lease be modified to provide for,
among other things, an increase in the size of the Premises, an extension of the
Term and an addition of an option to further extend the Term.
AGREEMENT
NOW THEREFORE, in consideration of the mutual promises and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree to
the above recitals and as follows:
1. Premises. The Lease is hereby amended to provide for a new
definition of the Premises. Effective December 1, 1996, approximately 23,381
additional square feet ("Expansion Areat') shall be added to the existing
approximately 38,987 square feet, for a total of approximately 62,368 square
feet which shall constitute the new Premises. The additional square feet
described in the foregoing sentence are shown on Exhibit A attached hereto and
incorporated by this reference.
2. Commencement Date. The provisions of the Lease shall become
applicable to the Expansion Area on December 1, 1996 and Tenant shall pay Rent
and Additional Charges on the Expansion Area as per the terms of the Lease
commencing on said date. Upon said date, the Rent and Tenant's Additional
Charges shall be determined using the rentable square feet within the Premises
as amended hereby.
3. Acceptance of Expansion Area. Upon taking possession of the
Expansion Area, Tenant shall be deemed to have accepted the Expansion Area in
its "As Is" condition, and to have acknowledged that the same fully comply with
Landlord's obligations under the Lease and this Amendment. Tenant shall be
entitled to construct certain improvements in the Expansion Area, subject to
obtaining Landlord's prior written consent of the architects, contractors and
all plans and specifications for such improvements before the commencement of
any work. Landlord shall provide to Tenant an improvement allowance of $150,000
to be applied towards actual costs in connection with Tenant's construction of
improvements in the Expansion Area. Landlord will fund such allowance within
thirty days of receipt of invoices for actual costs expended towards such
improvements. The provisions of the Lease shall apply to such improvements,
including, but not limited, to Articles 11 and 12 of the Lease.
Landlord hereby notifies Tenant that Landlord does not know, and does not have
reasonable cause to believe, that any Hazardous Materials has come to be located
on or beneath the Expansion Area. In the event Hazardous Materials are
discovered to have been released in, on, under or about the Expansion Area by
Pacific Data Products, prior to the Commencement Date for the Expansion Area,
Landlord agrees to diligently pursue Landlord's applicable rights and remedies
pursuant to Landlord's current lease agreement with Pacific Data Products
arising from any remediation required as a result of such Hazardous Materials.
Additionally, in the event Pacific Data Products remains in the Expansion Area
after the Commencement Date, without having subleased the Expansion Area from
Tenant as provided below, then Landlord agrees to enforce Pacific Data Products'
surrender obligations under the current lease of the Expansion Area.
<PAGE> 2
4. Extension of Term Rent. The Term of the Lease is hereby extended for
an additional period of forty-eight months ("Extension Term") with the new
Expiration Date being August 31, 2003. Rent during the Extension Term shall be
payable at the following rates per rentable square foot of the Premises per
month:
September 1, 1999 Through August 31, 2000 $ .97
September 1, 2000 Through August 31, 2001 $1.00
September 1, 2001 Through August 31, 2002 $1.04
September 1, 2002 Through August 31, 2003 $1.08
5. Option to Extend Term. Subject to all of the terms and conditions of
the Lease, Tenant shall have a one time option ("Extension Option") to further
extend the Term of the Lease for an additional five (5) years. Tenant must
deliver irrevocable written notice to Landlord of Tenant's exercise of the
Extension Option not later than August 31, 2002. Tenant's failure to timely
deliver such notice shall constitute an automatic termination of the Extension
Option and Tenant shall have no further right to extend the term of the Lease.
During the five year extension, Rent and Additional Charges shall be based on
100% of the then current fair market value of the Premises, as determined at
that time for comparable space in the Project, but in no event shall such
amounts be less than the Rent and Additional Charges paid by Tenant during the
prior year under the Lease. If Landlord and Tenant are unable to agree to the
fair market value of the Premises for the additional five year extension term,
then the matter shall be submitted to arbitration for determination under the
procedures set forth in the Lease.
6. Security Deposit. Upon execution of this Amendment, Tenant shall pay
to Landlord in immediately available funds as a portion of the Security Deposit
held by Landlord pursuant to the terms and conditions of the Lease, an amount
equal to $26,500.00, in order to adjust the amount of the Security Deposit so
that the amount of the Security Deposit held by Landlord shall be $65,700.00.
7. Contingent Upon Termination of PDP Lease. Tenant acknowledges that
the Expansion Area is currently occupied by Pacific Data Products under the
terms of a lease between Pacific Data Products and Landlord. Landlord shall have
no obligations under this Amendment and this Amendment shall not be effective
unless and until Landlord and Pacific Data Products enter into a termination
agreement in a form acceptable to Landlord pursuant to which Pacific Data
Products agrees to vacate the Expansion Area by no later than November 30, 1996.
Landlord agrees to diligently and in good faith negotiate a mutually
acceptable termination agreement with Pacific Data Products and, if such
termination agreement is not executed by both Landlord and Pacific Data Products
by November 1, 1996, this Second Amendment to Lease shall be null and void and
be of no further force or effect, and neither party shall have further rights or
obligations to the other except that Landlord shall return any payment made by
Tenant to Landlord. Notwithstanding Landlord's termination of the current lease
of the Expansion Area to Pacific Data Products, Landlord hereby preapproves
Pacific Data Products as a subtenant of Tenant in the Expansion Area pursuant to
a sublease between Tenant and Pacific Data Products, in a form reasonably
acceptable to Landlord, and subject to all terms and conditions of the Lease
including without limitation the provisions of Article 18 of the Lease.
8. Broker's Commissions. Tenant represents and warrants that it has not
entered into any agreement or incurred or created any obligation which might
require Landlord to pay any broker's commission, finder's fee or other
commission or fee relating to subject matter of this Amendment.
9. Lender Consent. Landlord shall diligently pursue and obtain from the
Mortgagee of Landlord's interest in the Project appropriate consents to this
Second Amendment to Lease.
10. Miscellaneous.
<PAGE> 3
10.1 Further Assurances. Each of the parties hereto agrees to execute
all documents and instruments and to take all other actions as may specifically
be provided for herein or in the Lease as may be required in order to consummate
the purposes of this Amendment.
10.2 No Third Parties. Except as specifically set forth herein, no
third party shall be benefitted by any of the provisions of this Amendment, nor
shall any such third party have the right to rely in any manner upon any of the
terms hereof, and none of the covenants, representations, warranties or
agreements herein contained shall run in favor of any third party not
specifically referenced herein.
10.3 Legal Expenses. The prevailing party in any litigation or dispute
over rights, remedies or duties arising under this Amendment shall be entitled
to recover, in addition to other appropriate relief, its reasonable costs and
expenses, including, without limitation, attorneys' fees and court costs. Such
entitlement shall include costs and expenses incurred in the collection of any
judgment or settlement.
10.4 Integration: Interpretation. This Amendment in combination with
the Lease contains or expressly incorporates by reference the entire agreement
of the parties with respect to the matters contemplated herein and supersedes
all prior negotiations. Except as specifically set forth herein, the Lease
remains unmodified and in full force and effect.
10.5 Construction. The parties acknowledge that each party and its
counsel have reviewed this Amendment. The parties agree that the rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Amendment.
10.6 Severability. If any provision of this Amendment or of the Lease
shall be determined by a court of competent jurisdiction to be invalid, illegal
or unenforceable, that portion shall be deemed severed therefrom and the
remaining parts shall remain in full force as though the invalid, illegal, or
unenforceable portion had never been a part thereof.
10.7 No Defaults. Tenant hereby represents and warrants that it is not
in default under the Lease nor do any facts or circumstances exist which with
the passage of time or the giving of notice, or both, could ripen into a
default.
IN WITNESS WHEREOF, this Amendment has been executed as of the date
first above set forth.
LANDLORD: TENANT:
SORRENTO TECH ASSOCIATES, APPLIED DIGITAL ACCESS,
a California limited partnership a California corporation
By Barnes Canyon RPF Realty By ______________________
Corp., a Connecticut
corporation, General ______________________
Partner
[Print Name and Title]
By
____________________
Mark S. Knapp,
Vice President
<PAGE> 4
EXHIBIT A
[Expansion Area]
<PAGE> 1
EXHIBIT 10.6
LEASE CONTRACT
APPLIED DIGITAL ACCESS
AND
ROSE HULMAN INSTITUTE OF TECHNOLOGY
<PAGE> 2
CONTENTS
Section Number Page
- -------------- ----
SECTION 1: THE LEASED PREMISES..............................................6
1.1: DESCRIPTION......................................................6
1.2: CONDITION........................................................6
SECTION 2: THE TERM.........................................................7
2.1: PRIMARY TERM.....................................................7
2.2: OPTIONAL TERMS...................................................7
SECTION 3: RENTS AND PAYMENTS...............................................7
3.1: RENT.............................................................7
3.2: ADDITIONAL RENTS.................................................7
SECTION 4: USE OF THE LEASED PREMISES.......................................8
4.1: BUSINESS USE.....................................................8
4.2: GENERAL CONDITION................................................8
4.3: EXTERIOR USE.....................................................8
4.4: EXTERIOR APPEARANCE..............................................8
4.5: SIGNAGE..........................................................8
4.6: REFUSE AND HAZARDOUS SUBSTANCES..................................8
4.7: ACCESS TO THE LEASED PREMISES....................................9
4.8: SECURITY SYSTEM..................................................9
4.9: PARKING..........................................................9
SECTION 5: MAINTENANCE, REPAIRS AND ALTERATIONS.............................9
5.1: MAINTENANCE AND REPAIRS BY THE LANDLORD..........................9
5.2: MAINTENANCE AND REPAIRS BY THE TENANT...........................10
5.3: ALTERATIONS. ...................................................10
5.4: CONSTRUCTION AND REPAIR INCONVENIENCE...........................10
5.5: EMERGENCY ACTIONS. .............................................11
5.6: JANITORIAL MAINTENANCE..........................................11
SECTION 6: THE COMMON AREA.................................................11
6.1: DEFINITION......................................................11
6.2: USE OF THE COMMON AREA..........................................11
6.3: COMMON AREA MAINTENANCE ("CAM").................................11
SECTION 7: PUBLIC UTILITY SERVICES.........................................12
7.1: EXISTING UTILITY SERVICES.......................................12
7.2: MODIFICATIONS TO UTILITIES......................................12
7.3: PAYMENT FOR UTILITIES...........................................12
2
<PAGE> 3
SECTION 8: INDEMNITY AND INSURANCE.........................................12
8.1: INDEMNITY.......................................................12
8.2: LANDLORD'S INSURANCE............................................13
8.3: TENANT'S INSURANCE..............................................13
8.4: WAIVER OF SUBROGATION...........................................13
8.5: TENANT'S INSURANCE REIMBURSEMENT................................13
8.6: COMPLIANCE......................................................13
SECTION 9: LOSS............................................................14
9.1: LOSS BY DAMAGE OR DESTRUCTION...................................14
9.2: LOSS BY EMINENT DOMAIN..........................................14
SECTION 10: TAXES..........................................................15
10.1: TAXES PAID BY THE LANDLORD.....................................15
10.2: TAXES PAID BY THE TENANT.......................................15
10.3: REAL ESTATE TAX REIMBURSEMENT. ................................15
SECTION 11: TERMS OF SUCCESSION............................................15
11.1: TERMS OF SUBLEASING............................................15
11.2: TERMS OF ASSIGNMENT............................................16
11.3: AGREEMENT BINDING ON SUCCESSORS................................16
SECTION 12: DEFAULTS AND REMEDIES..........................................16
12.1: DEFINITION OF CONTRACT DEFAULTS................................16
12.2: REMEDIES.......................................................16
12.3: LANDLORD'S RIGHT OF RECOVERY...................................17
12.4: CONTRACT TERMINATIONS..........................................17
12.5: EXPENSE REIMBURSEMENT..........................................18
12.6: NO WAIVER PROVISION............................................18
12.7: EXCULPATION....................................................18
SECTION 13: MISCELLANEOUS PROVISIONS.......................................19
13.1: APPROVED HOLDOVER OCCUPANCY....................................19
13.2: VACATING THE LEASED PREMISES...................................19
13.3: EXCLUSIVITY OF TERMS...........................................19
13.4: AMENDMENTS AND ADDENDA.........................................19
13.5: GOVERNING LAW..................................................19
13.6: SUBORDINATION AND NON-DISTURBANCE. ............................19
13.7: FORCE MAJEURE..................................................20
13.8: ESTOPPEL CERTIFICATE...........................................20
13.9: COMPLIANCE WITH LAWS...........................................20
13.10: AGENT'S AUTHORITY.............................................20
13.11: QUIET ENJOYMENT...............................................20
3
<PAGE> 4
SECTION 14: NOTICES........................................................21
SECTION 15: ACCEPTANCE AND EXECUTION.......................................21
NOTARIZATIONS...............................................................22
"EXHIBIT A".................................................................23
"EXHIBIT B".................................................................24
"EXHIBIT C".................................................................25
"EXHIBIT D".................................................................26
4
<PAGE> 5
LEASE AGREEMENT
RECITATIONS
THIS LEASE AGREEMENT ("Lease"), made and entered into September 15, 1996,
by and between Rose Hulman Institute of Technology, a private engineering
college in the State of Indiana acting by and through its authorized leasing
agent, Ragle and Company ("Landlord"), and Applied Digital Access, a corporation
in the State of California, ("Tenant"), WITNESSETH THAT:
WHEREAS the Landlord is the owner of certain property and improvements as
described herein and is authorized and empowered to enter into this Lease, and
WHEREAS the Tenant does now desire to lease from the Landlord certain
facilities and/or property as described herein, now therefore
The Landlord hereby leases to the Tenant and the Tenant hereby leases from
the Landlord said facilities and/or property for and in consideration of the
mutual covenants and conditions agreed upon by both parties as contained and
described hereinafter.
SECTION 1: THE LEASED PREMISES
1.1: DESCRIPTION. Upon and subject to all the provisions and terms of this
Lease, the improvements and/or property being leased by the Tenant and affected
by this Lease ("Leased Premises") is described and defined as a portion of 200
East Campus Drive, consisting of approximately 12,600 square feet of floor area,
which space is situated in, and part of a facility commonly referred to as Aleph
Park West ("Facility") located on the west side of State Highway 46 one mile
south of Interstate 70, Vigo County, Indiana, along with the non-exclusive right
to use common areas.
Said Leased Premises are depicted in red on a site plan drawing attached
hereto and labeled "Exhibit A" The legal descriptions, easements, variances and
right-of-ways, both existing and future, recorded in the applicable deeds,
titles and abstracts shall govern the boundaries and accessibility of the Leased
Premises.
1.2: CONDITION. Subject to the terms of this Lease, the Leased Premises
are being leased in "as is" condition. Subject to the terms of this Lease,
Tenant's commencement of occupancy shall be deemed its acceptance of the Leased
Premises in its then existing condition. See "Exhibit C", attached hereto, for
work to be performed by Landlord prior to Tenant's occupancy.
Landlord shall complete Landlord's Work no later than the Commencement Date,
subject to punch list items and force majeure. Tenant shall complete work
described in "Exhibit D," attached hereto and incorporated herein, (Tenant's
Work") prior to Tenant's occupancy, subject to punch list items and force
majeure. Landlord acknowledges and agrees that it has approved Tenant's Work.
(Tenant's Work and Landlord's Work shall be referred to, collectively, as
"Tenant Improvements").
5
<PAGE> 6
Landlord shall (1) deliver the Leased Premises to Tenant clean and free of
debris and free from any material defect on the Commencement Date, and (2)
warrants to the Tenant that (i) existing plumbing, electrical systems, fire
sprinkler systems, lighting, air condition and heating systems and load doors,
if any, in the Leased Premises, shall be in good operating condition on the
Commencement Date, and (ii) the Leased Premises shall be in compliance with all
government codes and regulations, including the Americans With Disabilities Act
("ADA") on the Commencement Date. If a non-compliance with said warranty exists
as of the Commencement Date, Landlord shall promptly after receipt of written
notice from Tenant setting forth with specificity the nature and extent of such
non-compliance, rectify the same at Landlord's expense.
SECTION 2: THE TERM
2.1: PRIMARY TERM. The primary term for which this Lease shall remain in
effect will be for a period of Twelve (12) consecutive months (1 year) ,
("Primary Term"), which shall commence on the earlier of (i) completion of the
Tenant's Improvements or, (ii) October 1, 1996 ("Commencement Date"). This
Primary Term shall expire at midnight on the last day of the twelfth (12th) full
month following the Commencement Date.
2.2: OPTIONAL TERMS. The Tenant shall have Two (2) consecutive options to
extend this Lease for additional consecutive terms of One (1) year each,
("Options"), which shall commence upon the expiration of the Primary Term or the
prior Option term upon the Tenant's delivery of written notice to the Landlord,
at least ninety (90) days prior to the expiration of the Primary Term or the
immediately preceding Option term, indicating its intent to exercise the Option
of the Leased Premises. The exercise of any Options shall be contingent upon the
Tenant's full compliance and performance of all the terms and conditions set
forth herein, within the applicable cure periods, as they pertained to the
Tenant's previous term of occupancy. All Options shall be subject to all the
terms and conditions contained herein.
SECTION 3: RENTS AND PAYMENTS
3.1: RENT. For and in consideration of all the terms and conditions
contained in this Lease, the Tenant shall pay to the Landlord, without demand, a
regular monthly rental payment of Thirteen Thousand, One Hundred Twenty-Five
Dollars ($13,125.00), beginning October 1, 1996, and no later than the first
business day and in advance of each consecutive month thereafter, through and
until the expiration of the Term or exercised Option term. The Tenant further
agrees to make all payments to the Landlord by a check or draft drawn and
payable to the Landlord and delivered and received by Landlord at the Landlord's
address as stipulated and or modified by the Landlord in Section 14 of this
Lease. Unpaid or late rents shall be subject to the penalties contained in
Section 12.2, hereinafter.
3.2: ADDITIONAL RENTS. In addition to regular monthly rental payments, all
sums that are payable by the Tenant to the Landlord under the terms of this
Lease shall be considered additional rent. Additional rentals not paid within
thirty (30) days after written notice from Landlord shall be subject to the
penalties contained in Section 12.2 hereinafter.
6
<PAGE> 7
SECTION 4: USE OF THE LEASED PREMISES
4.1: BUSINESS USE. The Tenant warrants that the Leased Premises will be
used exclusively for the purposes of general office, research, light
manufacturing, development and marketing. The Tenant further warrants that its
use of the Leased Premises shall be conducted within full compliance of all
federal, state and local laws, regulations and codes at all times. Any other use
of the Leased Premises shall be strictly prohibited without the written consent
of the Landlord which shall not be unreasonably withheld or delayed. Landlord
represents and warrants that Tenant's use of the Leased Premises is permitted by
all zoning and other applicable laws existing at the Commencement Date.
4.2: GENERAL CONDITION. Throughout the entire term of this Lease, and
notwithstanding the terms contained in Section 5, hereinafter, the Tenant shall
maintain the Leased Premises in at least as good a condition as was present at
the Commencement Date of this Lease normal wear and tear and casualty excepted.
The Tenant further warrants that it will maintain the decor and cleanliness of
its operation in a manner that is neat and befitting of a properly operated
establishment of this type. The Tenant shall maintain its conduct, activity,
noise levels or odors emitted from, or resulting from its use of the Leased
Premises, to levels that are not a nuisance to other tenants and/or neighboring
entities.
4.3: EXTERIOR USE. The Tenant does hereby acknowledge that the primary
function of the exterior area surrounding the Leased Premises is meant to
provide access and accommodate those conducting business with the Landlord and
other occupants of the Facility and property attached thereto. Any use of the
exterior area surrounding the Leased Premises, for the purpose of promoting,
merchandising, storage, or any other purpose is strictly prohibited without the
prior consent of the Landlord.
4.4: EXTERIOR APPEARANCE. The Tenant shall maintain the immediate exterior
of the Leased Premises in a clean and neat manner excepting those obligations
that are the Landlord's responsibility as described herein.
4.5: SIGNAGE. The Tenant may install signs within the Leased Premises
which are not visible from the exterior of the Leased Premises, without the
consent of the Landlord. Any signs which are visible from the exterior of the
Leased Premises, are subject to the prior written approval of the Landlord,
which shall not be unreasonably withheld or delayed. All costs for installing,
maintaining, repairing, changing and removing any signs on or about the Leased
Premises shall be borne by the Tenant. The Tenant shall be responsible for
procuring all necessary permits for, and comply with all applicable governmental
regulations and codes with respect to any such signage on or about the Leased
Premises.
4.6: REFUSE AND HAZARDOUS SUBSTANCES. The Tenant shall keep all trash,
refuse and other wastes in a proper and safe manner and in compliance with all
governmental regulations and codes applicable to the correct storage, transport
and disposal of all such waste. The Landlord shall arrange and pay for the
reasonable removal of non-hazardous waste. The Tenant shall not cause or permit
any hazardous substance or material (as may be defined at anytime during the
course of this Lease by any governmental authority) to be brought upon, handled,
stored, produced, emitted, discharged into the
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Leased Premises or the environment, disposed of or used upon, about, beneath, or
above the Leased Premises, or the Landlord's property, by the Tenant, its
agents, employees, contractors or invitees; provided Tenant shall be allowed to
lawfully use and store normal and customary office products, including, without
limitation, toner for copiers and printers, cleaning supplies, etc., in the
normal course of business in the Leased Premises. The Tenant shall indemnify and
defend the Landlord from any loss, liability, penalties, claims or orders by any
person, entity or governmental authority resulting directly or indirectly from
any claim arising from Tenant's use of hazardous material on or about the Leased
Premises. Notwithstanding any other provision of this Lease, Landlord represents
that as of the Commencement Date it is unaware of any Hazardous Substances
contamination or condition in, on or under the Facility. Notwithstanding this
representation, Landlord shall defend, protect, indemnify and hold Tenant
harmless against and from all liability and claims of any kind for loss or
damage to Tenant (including, but not limited to costs, expenses and reasonable
attorney's fees) incurred, directly or indirectly, as a result of the existence
of such Hazardous Substances contamination or condition, on, in or under the
Facility that was not caused by Tenant or its agents, employees or invitees.
4.7: ACCESS TO THE LEASED PREMISES. The Landlord warrants and represents
that the Tenant, upon paying all rentals as contained herein and abiding by all
the covenants and terms hereof, shall have the quiet enjoyment of the Leased
Premises and reasonable access thereto, subject, however, to the Landlord's
rights as contained herein. At all times, the Tenant agrees to maintain
reasonable safety and security of the Leased Premises in the interest of its own
property and that of the Landlord. The Landlord shall have the right, after
reasonable notice, to enter the Leased Premises during all regular business
hours for the purpose of inspecting, making repairs, modifications or exhibiting
the Leased Premises to prospective buyers, lessees or mortgagees, so long as it
shall not unreasonably interfere with the Tenant's operation. Further, the
Landlord may enter the Leased Premises at anytime, after notifying the Tenant or
in a potential emergency situation.
4.8: SECURITY SYSTEM. Tenant shall have the use of the existing security
system, which shall be shared with ICTT (the neighboring tenant). Tenant further
shall have the right, at its sole cost and expense, to modify the security
system as it deems appropriate (including, without limitation, installation of
independent control units or system of access security cards). Tenant shall pay
its pro rata share of the monthly security fees, wherein Tenant's pro rata share
shall equal the square footage of the Leased Premises divided by the total
leased and leasable square footage of the Facility.
4.9: PARKING. Tenant shall have the non-exclusive right, in connection
with its use and occupancy of the Leased Premises, to use a minimum of 35
parking spaces on a non-reserved basis at no additional cost to Tenant for
Tenant's employees, agents, invitees, customers, suppliers or contractors.
SECTION 5: MAINTENANCE, REPAIRS AND ALTERATIONS
5.1: MAINTENANCE AND REPAIRS BY THE LANDLORD. The Landlord shall be
responsible for reasonable maintenance and repair to a good condition the
structural portions of improvements situated on the Leased Premises, including
foundations, roof, down spouts, gutters, incoming utility mains and canopies.
Additionally, the Landlord shall be responsible for reasonable
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maintenance and repair to a good condition all plumbing, plumbing fixtures,
water heaters, all HVAC equipment (HVAC meaning heating, ventilating and air
conditioning) and the electrical system, which electrical repairs and
maintenance shall be limited to electrical switching panels, breaker boxes and
distribution wiring servicing the Leased Premises at Lease Commencement Date.
The Landlord will repair such items referred to above in a reasonably timely and
professional manner after being notified that such need exists. Landlord shall
not cause an interference with Tenant's business or interruption or reduction in
service to Tenant except to the extent required to do the repair work, and in
such event Landlord shall minimize interference with tenant's use of the Leased
Premises. Furthermore, the Landlord may repair or cause to be repaired any item
for which it is the Tenant's responsibility to maintain, should the Tenant fail
to take appropriate action to cure such condition within thirty (30) days
following the Landlord's delivery of written notice, and the Tenant hereby
agrees to fully reimburse the Landlord for any and all expenses incurred as a
result of such actions taken by the Landlord.
5.2: MAINTENANCE AND REPAIRS BY THE TENANT. Notwithstanding the items set
forth in Section 5.1 herein, the Tenant shall be responsible for the maintenance
and repair of all other non-structural, interior portions of the Leased
Premises, including, but not limited to, floor coverings, walls, wall coverings,
ceiling, interior lighting fixtures, signage fixtures, and other interior
fixtures and decor not specifically defined herein and to keep the same in good
and serviceable condition at Tenant's expense. The Tenant further agrees to
notify the Landlord in a timely manner, of any condition requiring maintenance
and/or repair that may be the Landlord's responsibility to perform, as defined
herein. Notwithstanding these representations, Tenant shall be responsible to
repair and restore any damage or casualty caused upon the Leased Premises by its
actions or use thereon.
5.3: ALTERATIONS. The Landlord reserves the right to physically alter or
modify the Leased Premises or any portion of the common area and property
attached thereto so long as such alteration does not unreasonably interfere with
the Tenant's use of the Leased Premises as defined herein (See also, Section
5.4). The Tenant shall obtain the prior approval of the Landlord, which shall
not be unreasonably withheld or delayed, before attempting any material changes
to the interior of the Leased Premises or modifications or repairs that may
affect the structure of the Facility or that may affect the incoming utility
services. The Tenant's removable equipment or trade fixtures shall remain the
property of the Tenant and may be removed by the Tenant on or before the
expiration of this Lease, providing the Tenant repairs any damage to the Leased
Premises resulting from such removal. Nothing in this Lease or any attachments
hereto shall be deemed in any way as constituting the request or consent of the
Landlord, expressed or implied, by inference or otherwise, to any contractor,
subcontractor, laborer or materialman for the performance of any labor or the
furnishing of any materials for any specific improvements, alteration or repair
of the Leased Premises as may be caused by the Tenant.
5.4: CONSTRUCTION AND REPAIR INCONVENIENCE. The Landlord, at its sole
discretion, may elect to effect repairs, maintenance or alterations to the
Leased Premises or any improvements or property attached thereto. In such
instances, the Tenant agrees to cooperate and grant the Landlord access, as
necessary, to the Leased Premises during reasonable periods. Landlord shall not
cause an interference with Tenant's business or interruption or reduction in
service to Tenant except to the extent required to do the repair work, and in
such event Landlord shall minimize interference with tenant's use of the Leased
Premises. Should such repair or modification threaten to materially disrupt the
Tenant's business operation to the extent that more than twenty-five percent
(25%) of the Tenant's
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floor space is rendered unusable for the Tenant's normal business activity, then
the Landlord shall make a reasonable effort to attain a mutually agreeable
method to accommodate the Tenant's operational needs, which shall include the
temporary and partial abatement of rent in proportion to the affected floor
space. Excepting Landlord's or its employee's, agent's or contractor's
negligence, willful misconduct or breach of this Lease, the Tenant shall hold
the Landlord harmless from any and all claims arising from the affect of such
repairs or modifications, whether within the confines of the Leased Premises or
on any portion of the property attached thereto. The Landlord shall (which shall
not include the employment of labor at overtime rates) minimize interference
with the Tenant's business operations and access during periods of such work.
5.5: EMERGENCY ACTIONS. If a condition arises in the Leased Premises or
the Landlord's property attached thereto, where an immediate need for emergency
action becomes necessary to avoid significant property damage or to reduce or
eliminate a potentially life-threatening situation and the Tenant is unable to
contact the Landlord or cannot take the time to contact the Landlord, then the
Landlord hereby consents to the Tenant's reasonable and necessary actions taken
to remedy such a condition. Furthermore, the Landlord agrees to reimburse the
Tenant for any reasonable and justifiable costs incurred by the Tenant in taking
such action, providing it was clearly taken in the best interest of both parties
and was for a repair or maintenance item for which the Landlord is responsible
under the terms of this Lease.
5.6: JANITORIAL MAINTENANCE. Reasonable interior janitorial service shall
be provided at no additional cost to the Tenant in accordance with "Exhibit B"
attached hereto.
SECTION 6: THE COMMON AREA
6.1: DEFINITION. The common area is described and defined as being those
areas contiguous with, but excluding leased or leasable areas that are provided
for the uses defined hereinafter. Such areas may include, but may or may not be
limited to parking areas, delivery areas, truck docks, sidewalks, landscaped
areas, patios, outdoor break areas, ponds, private roadways and the
appurtenances situated thereon.
6.2: USE OF THE COMMON AREA. The Landlord agrees to allow its tenants,
their employees, customers and invitees, the non-exclusive right to use the
common area for purposes of parking, employee break area, delivery and access,
only. Any other use of the common area is expressly prohibited without the prior
approval of the Landlord. Further, the Landlord retains the right to designate
particular portions of the common area for such use by the Tenant. Should the
Landlord designate specific portions of said common areas for the Tenant's
employee parking, break area, accessibility or delivery of goods, the Tenant
agrees to enforce such action, provided such designation does not unreasonably
interfere with Tenant's business operations.
6.3: COMMON AREA MAINTENANCE ("CAM"). The Landlord shall make reasonable
efforts, at its discretion, to maintain the common area in a good condition so
as to provide the tenants, their employees, customers and invitees with
reasonable ease of access to and from the Leased Premises. Such maintenance by
Landlord shall include reasonable and best-effort attempts to reduce the
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accumulation of snow, ice and dirt in common area parking, traffic and walkways
without assuming any liability to any of Tenant's employees, agents or invitees.
The Landlord shall reserve the right to reconfigure, close off, reduce or alter
all or any portion of the common area either temporarily or permanently, at any
time, providing, however, Landlord shall make reasonable and best-effort
attempts to insure that such action shall not unreasonably interfere with the
Tenant's business use.
SECTION 7: PUBLIC UTILITY SERVICES
7.1: EXISTING UTILITY SERVICES. The Landlord will provide and maintain
(unless maintained by the applicable utility company), reasonable access
necessary for the Tenant to connect to such services for the supply of
electricity, natural gas, water, sewer and telephone lines, so long as such
services are available at this location and were present at the Commencement
Date of this Lease. The Tenant understands that any one or more of the utility
services described herein may be interrupted by reason of accident, emergency or
repairs. Landlord shall interrupt or reduce services only to the extent required
to remediate the situation causing the interruption and should minimize
interference with Tenant's use of the Leased Premises. Except for Landlord's, or
its employee's, agent's or contractor's negligence, willful misconduct or breach
of this Lease, any such interruption shall not be construed as an eviction,
default, breach or create any right of the Tenant to make any claim against the
Landlord or release the Tenant from any of its obligations under the terms of
this Lease. Further, in no event shall Landlord be liable for any consequential
damages or loss of business by Tenant as a result of any such utility
interruption.
7.2: MODIFICATIONS TO UTILITIES. The Tenant agrees to obtain the prior
written approval from the Landlord, which shall not be unreasonably withheld or
delayed, before making any modifications to the Leased Premises which may in any
way alter the existing utility services. Utility fixtures that are owned by the
Tenant may be added or removed at the Tenant's discretion, so long as the
incoming utility supply is adequately sized to accommodate such fixtures. The
Tenant shall be required to obtain the prior written approval of the Landlord,
which shall not be unreasonably withheld or delayed, before removing or altering
any fixtures that are owned by the Landlord. The cost of any such utility
modifications, if approved by Landlord, shall be solely borne by the Tenant.
7.3: PAYMENT FOR UTILITIES. All normal and reasonable utility consumption
charges for electricity, water, sewer, gas, but excluding telephone service,
shall be borne by the Landlord.
SECTION 8: INDEMNITY AND INSURANCE
8.1: INDEMNITY. The Tenant shall protect, defend, indemnify and hold
harmless the Landlord from and against all damages, claims, liabilities, costs
and expenses (including reasonable attorney's fees) ("Claims") which (i) may
occur within the Leased Premises, or (ii) is caused by the negligence or willful
misconduct of Tenant or its employees or agents, unless any of the foregoing
Claims arise from the negligence or willful misconduct of Landlord or Landlord's
employees, agents, or contractors, or Landlord's breach of this Lease. The
Landlord shall protect, defend, indemnify and hold harmless
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the Tenant from and against all damages, claims, liabilities, costs and expenses
(including reasonable attorney's fees) arising from Landlord's or Landlord's
employees', agents' or contractors' negligence, willful misconduct or breach of
this Lease.
8.2: LANDLORD'S INSURANCE. The Landlord shall reasonably insure the
property and improvements on which the Leased Premises are located for damage
from fire and other customary risks (which shall not include coverage for
earthquake or flood damage) in an amount adequate to fully and functionally
replace the Leased Premises.
8.3: TENANT'S INSURANCE. The Tenant agrees to maintain insurance coverage
against the loss of its own property in, on or about the Leased Premises, by
fire or other hazards as the Tenant deems necessary. The Tenant hereby releases
the Landlord from any liability for damage to the Tenant's property excepting
incidents caused by the willful misconduct or grossly negligent action of the
Landlord, its employees or agents. The Tenant further warrants that such
insurance policy shall contain a waiver of subrogation recognizing the
Landlord's release from such liability. Additionally, each party of this Lease
agrees to maintain in full force and effect during the term of this Lease,
general liability insurance coverage with a minimum single-occurrence limit of
one million dollars ($1.0 million) for any incident occurring on or about the
Leased Premises and common areas resulting from the actions, negligence, conduct
or operations of each respective party, their employees or agents. The Tenant
further agrees to name Landlord as additional insured in such liability policy
and, upon request, to provide the Landlord with proof of all such policies and
any subsequent renewals, endorsements, modifications or cancellations.
8.4: WAIVER OF SUBROGATION. Each party waives all rights of recovery
against the other party, and its officers, employees, agents and representatives
for any claims for loss or damage to person or property caused by or resulting
from fire or any other risks insured against under any insurance policy in force
at the time of such loss or damage. Each party shall cause each insurance policy
obtained by it to provide that the insurer waives all rights of recovery by way
of subrogation against the other party in connection with any damage covered by
such policy.
8.5: TENANT'S INSURANCE REIMBURSEMENT. Should the cost of Landlord's
insurance policies required by the terms herein be increased during the term of
this Lease, then the Tenant agrees to pay its proportionate share of such
increase. Said amount shall be calculated by subtracting the base insurance
premium(s) due by the Landlord ("base" meaning the first insurance premiums due
and payable during the first twelve months of this Lease), from the increased
premiums, and dividing the difference by the total leased and leasable area
(square footage) located in the Facility. The resulting quotient shall then be
multiplied by the square footage of the Tenant's Leased Premises resulting in
the proportionate share to be reimbursed by the Tenant. If the Tenant has
occupied the Leased Premises for a period that is less than the policy year,
then the Landlord shall adjust the aforementioned calculation to reflect only
the Tenant's period of occupancy. The Landlord shall submit a descriptive
invoice, detailing its calculation for such insurance recovery and the Tenant
shall reimburse the Landlord within thirty (30) days thereafter.
8.6: COMPLIANCE. Should any situation or condition within the Leased
Premises adversely affect the Landlord's ability to procure or maintain adequate
insurance coverage for the Facility, and
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should such condition be in the control of the Tenant, then the Tenant hereby
agrees to comply with, and or remedy such condition within thirty (30) days of
receiving written notification regarding the need for any corrective action on
the part of the Tenant and subsequently agrees to notify the Landlord, in
writing, when such actions have been completed.
SECTION 9: LOSS
9.1: LOSS BY DAMAGE OR DESTRUCTION. If, during the term of this Lease,
one-third (1/3) or less of the Leased Premises or the Facility become damaged by
fire or other casualty, then the Landlord shall restore or rebuild the Facility
to a condition as practically similar to the original condition as is
reasonable, and shall diligently do so within a reasonable and timely period.
Should the Leased Premises be totally or partially untenable by reason of such
restoration, then the Tenant's rental payments shall be abated in proportion to
such untenable area until the area is suitable for Tenant's use as defined
herein. Should (i) more than one third (1/3) of the Leased Premises or the
Facility attached thereto incur damage or destruction, (ii) the Landlord and
Tenant mutually determine that restoration and repair cannot be reasonably
completed within ninety (90) days after the date of such damage, (iii) the
Landlord fail to commence and diligently pursue such repair and restoration to
completion within ninety (90) days, or (iv) the damage or destruction occur
within the last six (6) months of the Lease Term, then the Landlord or Tenant
shall have the right to terminate this Lease as of the date of such damage or
destruction. If neither party terminates this Lease, then Landlord shall
promptly and diligently rebuild all of the damaged Facility to substantially the
same condition as before such damage or destruction and continuing rentals or
rental abatement shall apply as previously set forth in this paragraph. Should
the Landlord elector Tenant elect to terminate this Lease, then this Lease shall
thereupon terminate as of the day and date of such damage, providing all rentals
and charges are proportionately paid through and until the date of said damage.
All casualty insurance proceeds under policies procured by Landlord shall belong
to Landlord.
9.2: LOSS BY EMINENT DOMAIN. The term "public authority" as used in this
Section shall include any corporation, firm, association or other entity,
whether publicly or privately owned, having the power of eminent domain. The
term "eminent domain" shall include the exercise of any similar governmental
power or any purchase or other acquisition by such entity under the threat of
such taking or condemnation. Should all or any portion of the Leased Premises or
common areas attached thereto be taken by public authority under the power of
eminent domain so as to substantially interfere with Tenant's use of the Leased
Premises prior to such condemnation, then the Tenant shall have the option of
canceling this Lease providing it supplies written notice to the Landlord of its
intentions to do so and submits to the Landlord its proportional share of all
rentals and other outstanding balances due, through and until the date of such
taking. Should the Tenant not elect to cancel this Lease in the event of such
taking and the Leased Premises are totally or partially untenable by reason of
such taking, then the Tenant's rental payments shall be abated in proportion to
such untenable area until the area is suitable for Tenant's use as defined
herein. Landlord shall diligently restore the portion of the Leased Premises
remaining useable to as near its former condition as reasonably possible.
All damages awarded, or compensation paid for any such taking or
conveyance shall become the sole property of the Landlord, whether such payments
shall be awarded as compensation for diminution in value to the leasehold or for
the reduction of any leased premises; provided, however, that Tenant
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shall have the right to make a claim and the Landlord shall not be entitled to
any payments made to the Tenant for loss of business, or costs for moving to new
lease space, or removing or loss of personal property and fixtures owned by the
Tenant. Should such taking permanently reduce the area of the Leased Premises,
the Landlord shall proportionately reduce Tenant's rentals, unless the Lease is
terminated in which event Tenant shall have no liability for rent or the other
obligations under this Lease.
SECTION 10: TAXES
10.1: TAXES PAID BY THE LANDLORD. The Landlord shall pay all real estate
taxes levied on the Leased Premises and the facilities and property attached
thereto.
10.2: TAXES PAID BY THE TENANT. The Tenant agrees to pay any taxes or
assessments levied against its operation, inventory or any other property it may
own or cause to have located on or about the Leased Premises.
10.3: REAL ESTATE TAX REIMBURSEMENT. Should the property on which the
Leased Premises is situated be reassessed or incur any other levy or increase
during the term of this Lease, then the Tenant agrees to reimburse the Landlord
for its proportionate share of such an increase. Said reimbursable amount shall
be calculated by subtracting the base tax due by the Landlord ("base" amount
being the real estate taxes due and payable during the first twelve months of
this Lease), from the increased tax amount and dividing the difference by the
total leased and leasable area (square footage) of the Facility. The resulting
quotient shall then be multiplied by the square footage of the Leased Premises
resulting in the proportionate share owed by the Tenant. If the Tenant has
occupied the Leased Premises for a period that is less than the taxable period
affected, then the Landlord shall adjust the aforementioned calculation to
reflect only the Tenant's period of occupancy. The Landlord shall submit an
invoice within sixty (60) days of such tax payments detailing its calculation of
said tax reimbursement, along with copies of Landlord's paid tax receipts. The
Tenant shall reimburse the Landlord within thirty (30) days following the
delivery of said invoice or be subject to the late fee penalties defined
hereinafter. The following shall not constitute real estate taxes for purposes
of this Lease: (A) any state, local, federal, personal or corporate income tax
measured by the income of Landlord; (B) any estate, inheritance taxes, or gross
rental receipts tax; (C) any franchise, succession or transfer taxes; (D)
interest on taxes or penalties resulting from Landlord's failure to pay taxes;
(E) any increases in taxes attributable to additional improvements to Leased
Premises unless the improvements were constructed by Tenant or at Tenant's
request; (F) any increases in taxes attributable to change of ownership of all
or any part of the Leased Premises or Facility resulting from the sale,
refinancing, transfer of ownership or conveyance of the Leased Premises or
Facility after the Commencement Date; (G) any taxes which are essentially
payments to a governmental agency for the right to make improvements to the
Leased Premises or surrounding area.
SECTION 11: TERMS OF SUCCESSION
11.1: TERMS OF SUBLEASING. The Tenant is prohibited from subletting all or
any portion
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of the Leased Premises without first obtaining the expressed written consent of
the Landlord, which shall not be unreasonably withheld or delayed. Should the
Landlord consent to any such sublease, the Tenant shall remain primarily liable
and responsible to the Landlord for the full and complete performance of all the
terms and conditions in this Lease.
11.2: TERMS OF ASSIGNMENT. Tenant is prohibited from assigning all or any
portion of this Lease to a successor party without first obtaining the expressed
written consent of the Landlord, which shall not be unreasonably withheld or
delayed.
11.3: AGREEMENT BINDING ON SUCCESSORS. The covenants, agreements and
obligations contained herein shall extend to, bind and inure to the benefit not
only to the parties hereto, but their respective personal representatives,
heirs, successors and assigns.
SECTION 12: DEFAULTS AND REMEDIES
12.1: DEFINITION OF CONTRACT DEFAULTS. The occurrence of any one or more
of the following events shall be deemed a contract default ("Default"):
(a) Should the Tenant cause the assignment, attachment or execution on or
against the Leased Premises or any property attached thereto, representing it as
property of the Tenant, and the same is not released or discharged within sixty
(60) days thereafter.
(b) Should the Tenant attempt to assign this Lease for the benefit of creditors.
(c) Should either party commence, or be forced into proceedings conducted in a
court of competent jurisdiction for the purpose of adjudicating a
reorganization, liquidation, dissolution, bankruptcy, insolvency, or for the
court appointment of a receiver of the respective party's property and the same
is not dismissed within sixty (60) days thereafter.
(d) Should the Tenant cause a mechanic's lien to be filed against the property
or Facility on which the Leased Premises is situated and the same is not
released, or otherwise provided for by indemnification, satisfactory to the
Landlord within sixty (60) days of the filing of said lien.
(e) Should either party fail to perform any of its respective covenants
contained in this Lease.
(f) Should Tenant fail to comply with all laws, regulations and codes of the
local governing body of jurisdiction, the State of Indiana and the United States
of America as they apply to the operation and use of the Leased Premises, and as
they may be modified or amended from time to time during the term of this Lease.
Should any such Default occur, then the non-defaulting party shall be
hereby justified in taking further action as stipulated hereinafter.
12.2: REMEDIES. In the event any such Default occurs, as heretofore
defined (other than a
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Default regarding any payment by the Tenant to the Landlord), then the
non-defaulting party shall give written notice detailing such Default to the
defaulting party and the defaulting party shall have thirty (30) days thereafter
to cure such Default. Should such Default remain unremedied after said thirty
(30) day period, then unless the defaulting party has undertaken to cure the
Default within thirty (30) days and diligently and continuously attempts to
complete this cure as soon as reasonably possible, then the non-defaulting party
shall have the option of pursuing any or all of the following further actions:
(a) curing the Default for the reimbursable account and at the cost of the
defaulting party, (b) terminating this Lease, at which time the Tenant shall
have thirty (30) days to vacate the Leased Premises in accordance with the terms
of this Lease, (c) pursuing any other remedy available under this Lease or
available in law or in equity.
Any regular monthly rentals that are not postmarked or dispatched by the
Tenant within five (5) days of their due dates as specified and defined herein
shall be subject to a late fee assessment equaling One Hundred Dollars ($100.00)
for each day such rental payment remains unpaid. Additional rents that are not
paid within thirty (30) days of their invoice date shall incur and accrue
interest at a rate equaling two percent (2%) higher than the then current
national prime rate of interest as published in the Wall Street Journal. Said
interest shall continue to be accrued, compounded monthly and remain payable
until all payments due are paid in full to the Landlord. Furthermore, any breach
by Tenant in paying Landlord any sums due under this Lease shall entitle
Landlord to pursue any and all remedies afforded by this Lease for a default or
available in law or in equity.
12.3: LANDLORD'S RIGHT OF RECOVERY. Subsequent to the continuation of an
unremedied Default as heretofore described and defined, the Landlord may
lawfully re-enter the Leased Premises using such means as may be necessary, and
remove all persons and property therefrom, and the Landlord shall not be liable
to the Tenant for damages or other occurrences resulting from such re-entry.
Such re-entry, repossession and or removal by the Landlord shall not be
construed as a waiver, release or discharge of any obligations or liabilities of
the Tenant as they pertain to this Lease for the full term hereof unless
Landlord gives written notice of election to terminate this Lease. Upon
repossessing the Leased Premises, the Landlord shall use reasonable effort to
relet the Leased Premises. Should the Landlord elect to remove the Tenant's
property from the Leased Premises for the purpose of reletting the same, said
property shall be stored in a public warehouse or other similar facility at the
expense and for the account of the Tenant and the Landlord shall not be liable
for damage or costs incurred as a result of such action. Furthermore, the
Landlord shall be entitled to hold all such property owned by the Tenant as
security for any unpaid rentals and or other damages and expenses incurred by
the Landlord as a result of such Default. The Landlord shall also have the right
to cancel and terminate this Lease at anytime upon the continuance of a Default,
but shall be entitled to lawfully collect from the Tenant, all damages,
reasonable attorney's fees, leasing commissions and other similar expenses
incurred by the Landlord prior to and during such Default, repossession and
reletting resulting from said Default. Further, the Landlord shall be entitled
to collect and or pursue by due process of law, any unpaid rental balances or
other amounts due hereunder accrued through and until this Lease is terminated
by the Landlord, plus any rental deficiencies resulting from the subsequent
reletting of the Leased Premises, through the effective expiration date of this
Lease.
12.4: CONTRACT TERMINATIONS. Should either party elect to terminate the
Lease for valid reasons heretofore described, then the party initiating such
procedure shall give written notification, as stipulated herein, and the Tenant
shall have thirty (30) days thereafter to remove its property from the
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Leased Premises, providing the Landlord has not commenced repossession procedure
as previously stipulated. Any property remaining on the Leased Premises after
said thirty (30) day period shall become the property of the Landlord. The
Tenant shall pay the Landlord all unpaid rentals and other amounts due, daily
prorata share of the regular monthly rent, and any additional rents and/or
payable reimbursements through and until the date the Tenant surrenders the
Leased Premises to the Landlord. Such termination and payment(s) shall not
release or waive any rights of Landlord to pursue any and all other remedies
provided for in this Section 12.
12.5: EXPENSE REIMBURSEMENT. If the Landlord incurs any expense for the
purpose of curing or remedying a contract breach or Default after the applicable
cure period by the Tenant or to enforce the terms of this Lease, then the
expenses so incurred by the Landlord shall be deemed to be additional rent,
subject to, and as defined in the Section addressing "Additional Rent". In the
event litigation occurs between the two parties arising from the terms of this
Lease, the party prevailing in such litigation shall be entitled to have all of
costs, including reasonable attorney's fees, reimbursed by the non-prevailing
party.
12.6: NO WAIVER PROVISION. The violation or Default of any one or more of
the terms and conditions contained herein by either party shall not constitute a
waiver, release or discharge of that party's other obligations with respect to
this Lease. Further, should a violating party remedy a Default, after the
applicable cure period, such remedy shall not be construed as a release on the
part of that party, and the other party shall have the right to pursue from the
violating party, any reasonable expenses and/or damages incurred as a result of
such previous violation. Additionally, any failure on the part of the Landlord
to pursue any remedy for a Default shall neither be construed as a waiver, nor
release the obligations of the Tenant as they pertain to the terms of this
Lease, nor as a waiver of Landlords right to pursue any remedy for any
subsequent default.
12.7: EXCULPATION. Notwithstanding anything to the contrary contained in
this Lease or in any amendment thereto it is expressly understood and agreed by
and between the parties hereto that:
(a) The recourse of Tenant or its successors or assigns against Landlord
with respect to the alleged breach by or on the part of Landlord of any
representation, warranty, covenant, undertaking or agreement contained in the
Lease (collectively, "Landlord's Lease Undertakings") shall extend only to
Landlord's interest in the Facility of which the Leased Premises are a part and
not to any other assets of Landlord;
(b) Except to the extent of Landlord's interest in the Facility, neither
Rose-Hulman Institute of Technology, nor its Investment Management Committee nor
Ragle & Company, nor any of their respective directors, Board of Managers,
committee members, officers, employees or agents shall have any personal
liability whatsoever with respect to any breach by Landlord of any of Landlord's
Lease Undertakings; and
(c) Except to the extent of Landlord's interest in the Facility, no
personal liability or personal responsibility of any sort with respect to any of
Landlord's Lease Undertakings is assumed by or shall at any time be asserted or
enforceable against Landlord or Ragle & Company or against any of their
respective directors, Board of Managers, committee members, officers, employees,
agents or
17
<PAGE> 18
representatives.
SECTION 13: MISCELLANEOUS PROVISIONS
13.1: APPROVED HOLDOVER OCCUPANCY. Should the Tenant remain in possession
of the Leased Premises after the expiration of this Lease with the consent of
the Landlord, then the Tenant shall be deemed as occupying the Leased Premises
on a month-to-month term and shall continue to pay all rentals as were effective
immediately prior to the Lease expiration, including all effective
reimbursements, and shall be subject to all the other terms and conditions of
this Lease insofar as they relate to month-to-month tenancy, prior to its
expiration. Under the terms of such a month-to-month occupancy, either party
shall give the other at least thirty (30) days prior notification before
terminating this Lease, during which period all other terms, conditions and
obligations of this Lease shall being performed by each of the respective
parties.
13.2: VACATING THE LEASED PREMISES. Upon the expiration or termination of
this Lease, for whatever reason, the Tenant shall vacate and surrender the
Leased Premises in at least as good a condition as was prevailing on the
Commencement Date of this Lease, normal wear and tear, loss by casualty not
caused by Tenant or condemnation, excepted. Tenant shall not be required to
remove its improvements or the security system, as modified. Tenant shall have
the right to remove its equipment, trade fixtures and furniture, except that
Tenant shall repair any damage caused by its action or removals, and shall
restore and surrender the Leased Premises in a condition similar to that
prevailing on the Commencement Date, normal wear and tear and casualty excepted.
13.3: EXCLUSIVITY OF TERMS. Both parties of this Lease acknowledge and
agree that the terms and conditions contained herein are inclusive of each
party's performance under the terms of this Lease and that all negotiations,
considerations, representations and understandings between the two parties have
been incorporated herein. No other terms, conditions, covenants or warranties,
whether written or verbally implied shall be considered or construed to be a
term of this Lease unless such condition is written and properly executed as an
addendum to this Lease.
13.4: AMENDMENTS AND ADDENDA. In the event a condition arises which, in
the judgement of both parties, has not been adequately addressed in this Lease,
then upon the two parties reaching a mutually acceptable resolution, an
amendment shall be drawn in writing by the Landlord and shall contain reference
to this Lease. Said amendment shall be dated and duly executed by both parties,
thereby becoming a part of this Lease.
13.5: GOVERNING LAW. The laws of the State of Indiana shall govern the
validity, performance and enforcement of this Lease. The invalidity or
unenforceability of any individual provision(s) of this Lease shall not affect
or impair any other provision.
13.6: SUBORDINATION AND NON-DISTURBANCE. This Lease is, and shall be
subject and subordinate at all times to any mortgages, liens or encumbrances
resulting from any method of financing or refinancing by the Landlord, which may
now or hereafter affect the Leased Premises, providing Tenant shall receive a
Non-Disturbance Agreement from any lender, beneficiary or mortgagor
18
<PAGE> 19
warranting that neither this Lease, nor Tenant's possession will be disturbed so
long as Tenant attorns to the record owner of the Leased Premises. The Tenant
hereby attorns to any underlying mortgagee and shall promptly execute any
certificate or other instrument which the Landlord or such mortgagee may request
in confirmation of such subordination and attornment.
13.7: FORCE MAJEURE. Whenever this Lease requires any physical act (other
than the payments required herein) to be performed by or within a certain time,
that time shall be extended by a period equal to any delays that have been
caused by war, strikes, lockouts, civil commotion, uncontrollable material
shortages, casualties, acts of God or any other condition of delay that is
beyond the control of the party required to perform such act.
13.8: ESTOPPEL CERTIFICATE. Within ten (10) days following the receipt of
a written request from the Landlord, the Tenant shall execute, acknowledge and
deliver to the Landlord or to any individual or entity designated by the
Landlord, a written statement certifying: (a) that this Lease is in full force
and effect and has not been modified (or, if modified, stating the nature of
such modification), (b) the date to which the rentals have been paid, and (c)
that there are no uncured Defaults (or specifying such Defaults if any are
claimed). Furthermore, the Tenant agrees to provide as part of the estoppel
certificate any other information reasonably requested by the Landlord. The
Tenant hereby acknowledges that any such statement may be relied upon by any
prospective purchaser or lender.
13.9: COMPLIANCE WITH LAWS. Tenant shall comply with the requirements of
municipal, county, state, federal and other applicable governmental authorities
now in force, or which may hereafter be in force ("Applicable Laws"), pertaining
to the interior, non-structural portion of the Leased Premises. Tenant shall not
be required to pay for or make any structural changes or capital expenditures in
or on the Leased Premises or common areas in order to comply with any Applicable
Law unless such changes and expenditures are required to accommodate Tenant's
particular use of the Leased Premises as defined herein. Subject to the
foregoing, Landlord shall comply with all Applicable Laws pertaining to the
Leased Premises and common areas.
13.10: AGENT'S AUTHORITY. The Landlord, in consenting below to this Lease,
signifies its approval of the terms and provisions of this Lease and authorizes
Ragle & Company as its leasing agent to enter into this Lease on behalf of the
Landlord and Ragle & Company is hereby appointed by Landlord as its agent for
the purpose of administering and enforcing the terms hereof and until further
notice from Landlord the Tenant may rely upon Ragle & Company as the Landlord's
authorized leasing and management agent with who Tenant may deal pertaining to
any term or provision of this Lease.
13.11: QUIET ENJOYMENT. Provided Tenant has performed all of the terms,
covenant, agreements and conditions of the Lease, including the payment of rent,
to be performed by Tenant, Tenant shall peaceably and quietly hold and enjoy the
Leased Premises for the term hereof, without hindrance from Landlord, or any
party claiming under or through Landlord subject to the terms and conditions of
this Lease and Landlord shall defend Tenant's right to such use and occupancy.
19
<PAGE> 20
SECTION 14: NOTICES
Any notices or consents required in the provisions of this Lease shall be
delivered in person, by mailing or courier to the addresses provided hereafter.
Either party shall be required by the same means, to notify the other party of
any change in its address contained herein.
To the Landlord's Authorized Agent: Ragle & Company
P.O. Box 537
Terre Haute, IN 47808
C/O John G. Ragle
To the Tenant: Applied Digital Access
9855 Scranton Road
San Diego, CA 92121
C/O James Keefe
SECTION 15: ACCEPTANCE AND EXECUTION
IN WITNESS WHEREOF, the Landlord and Tenant have each caused this Lease
contract to be executed and effective by their duly authorized representatives
affixing their signatures hereto as of the day and year first written above.
LANDLORD'S AUTHORIZED AGENT TENANT:
Ragle and Company, Inc. Applied Digital Access Corp.
by:_________________________________ by:___________________________________
(signature) (signature)
John G. Ragle, President James Keefe, Chief Financial Officer
Consented to by: Rose Hulman Institute of Technology
by:_____________________________________________
Printed Name:___________________________________
Title:__________________________________________
20
<PAGE> 21
NOTARIZATIONS
STATE OF INDIANA )
) SS:
COUNTY OF VIGO )
Before me, a Notary Public within and for said County and State, on this
_____________________ day of _______________________________________,
19________, personally appeared John G. Ragle, known to me to be the duly
authorized representative of Rose Hulman Institute of Technology, (the
Landlord), a private Indiana college, of whom having been sworn, acknowledged
the execution of the foregoing contract for and on behalf of the said party.
WITNESS my hand and Notarial Seal.
_______________________________
Notary Public (signature)
(seal)
_______________________________
Notary Public (printed name)
My County of Residence_________________
My Commission Expires__________________
* * * * * * *
STATE OF _________________________ )
) SS:
COUNTY OF )
Before me, a Notary Public within and for said County and State, on this
__________________ day of ____________________________________________________,
19________, personally appeared
________________________________________________________, known to me to be the
duly authorized representative of
_____________________________________________________ (the Tenant), a
corporation/resident of the State of _________________________________, of whom
having been sworn, acknowledged the execution of the foregoing contract for and
on behalf of said party.
WITNESS my hand and Notarial Seal.
____________________________________________
Notary Public (signature)
(seal)
____________________________________________
Notary Public (printed name)
My County of Residence_________________________
My Commission Expires__________________________
21
<PAGE> 22
(Insert "EXHIBIT A" Here)
22
<PAGE> 23
"EXHIBIT B"
Janitorial Service Outline
For
Applied Digital Access
Daily Service (3x per week)
Empty all trash receptacles and replace liners as necessary including
front entry and ashtray container.
Remove all collected trash to designated area.
Refill dispensers, empty trash, clean and sanitize all restroom fixtures,
wipe all counters, clean mirrors, wipe chrome, spot wipe partitions, sweep
and damp mop floors using a germicidal cleaner, clean and sanitize
showers.
Empty all trash receptacles and replace liners as necessary.
Remove all collected trash to designated area.
Dust mop all hard surface floors with treated or electrostatic dust mop.
Ensure coffee maker is turned off.
Weekly Service (2x per week)
Vacuum all carpeted traffic lane areas.
Mop all stains and spills, especially coffee and drink spills.
Weekly Service (1x per week)
Dust all horizontal surfaces.
Spot clean all walls, light switches and doors.
Fully vacuum all carpets from wall to wall.
Clean both sides of all glass doors and side glass.
Damp mop entire area.
Dust mop all hard surface floors with treated or electrostatic dust mop.
Sweep entire front sidewalk.
Monthly Service (1x per month)
Dust high and low areas (e.g., pictures, clocks, partition tops, etc.)
Dust wipe all telephones including ear and mouth piece.
Using approved spotter, spot clean carpeted area.
Completely clean both sides of all exterior ground level windows.
Wipe clean office furniture.
Vacuum all upholstered furniture.
Dust venetian blinds.
Quarterly Service (every 4 months)
Machine scrub hard surface floor.
Using a high speed floor machine spray buff all hard surface area.
Bi-Yearly (every 6 months)
Hot water extract (steam clean) carpeting using high pressure extraction
equipment.
Clean all partition glass.
Yearly (1x per year)
Machine scrub hard surface floor and apply one coat of polish, allow to
dry, then buff.
23
<PAGE> 24
Strip hard surface floor and recoat with three coats of floor wax.
"EXHIBIT C"
Landlord's Work
The following work is to be completed by Landlord:
1. Two (2) doors leading to ICTT's portion of the Facility are to be removed,
closed in with drywall, painted and trim installed as appropriate.
2. Repair the two inch gap on bottom of the overhead garage door panel and
repair water damage to carpet resulting from water penetrating through gap
in garage door.
24
<PAGE> 25
"EXHIBIT D"
Tenant's Work
The following work is to be completed to the Leased Premises by Tenant:
Attached hereto and incorporated herein is Tenant's scope of work and plans for
Tenant's Work.
1. New entrance doors with window walls to enclose vestibule.
2. Extend sidewalk to the new entrance and demo bushes.
3. Install exit signs per code.
4. Demo existing walls to create hallway.
5. Demo training room walls.
6. Columns are load bearing and will be incorporated in cubicle layout.
7. Construct 3/4 high walls similar to design provided.
8. Reception desk and storage cabinets as shown on sketches.
9. Painting/finishing of all existing/new walls/plate covers over large conduits
and remove those required by owner.
10. New floor to separate ICTT entrance.
11. Resize office to become locked storage rooms located off of new hallway per
drawings.
12. Remove wall at copier area (manager CPT).
13. Provide mechanical, electrical and tile flooring in southwest computer lab
which includes temp. Controls, power for 25 computer stations and a separate
unit to service this room only but does not include humidification controls.
14. Repair/replace carpet effected by wall demolition with existing carpet.
15. Repair/replace ceiling tile damaged or stained.
16. Provide new floor base on new walls and repair any loose base throughout.
17. Relocate ceiling lighting as required per cubical layout.
25
<PAGE> 26
18. Included a budget for lobby furniture. ($2,500.00)
19. Removal of installed floor-to-ceiling Herman Miller partitions/walls.
20. Re-install Herman Miller partitions/spot cleaning per original layout.
21. Change all light switches/covers to white.
22. Enclosed coat room with bi-fold doors for storage area.
23. Final cleaning and general office cleaning.
26
<PAGE> 1
EXHIBIT 10.7
AGREEMENT FOR EXTENSION OF TERM
(AMENDMENT NO. 2)
This Agreement for Extension of Term is entered into by and between U S WEST
Business Resources, Inc., a Colorado corporation, with offices for transaction
of business located at 788 Inverness Drive West, Englewood, Colorado 80112, as
agent for U S WEST Communications, Inc. ("Customer") and Applied Digital Access,
Inc., with offices for transaction of business located at 6175 Lusk Boulevard,
San Diego, California 92121 ("Supplier").
RECITALS
Customer and Supplier entered into that certain agreement styled "General
Purchasing Agreement" dated February 19, 1994, as amended by Amendment No 1
dated February 1, 1996 (the "Agreement").
The term of the Agreement will automatically expire on August 16, 1996 (the
"Expiration Date"); and Customer and Supplier wish to extend the term of the
Agreement beyond the Expiration Date under the terms and conditions hereof.
AGREEMENT
In consideration of mutual promises and advantages to the parties, the parties
incorporate by reference and agree to the accuracy of the above recitals and
further agree that the Agreement shall not expire on the Expiration Date, but
shall automatically renew for an additional six (6) month period commencing on
August 17, 1996, and will automatically expire on February 16, 1997. All other
terms and conditions of the Agreement remain unchanged and shall all continue in
full force and effect.
The term "Customer" as used herein may be applicable to one or more parties and
the singular shall include the plural. If there shall be more than one party
referred to as Customer herein, then their obligations shall be several, not
joint.
The parties intending to be legally bound have executed this Agreement for
Extension of Term as of the dates set forth below in multiple counterparts each
of which is deemed an original but all of which together shall constitute one
and the same instrument.
U S WEST BUSINESS RESOURCES, INC. APPLIED DIGITAL ACCESS, INC.
AS AGENT FOR
U S WEST COMMUNICATIONS, INC.
- ------------------------------------ -----------------------------------
(AUTHORIZED SIGNATURE) (AUTHORIZED SIGNATURE)
- ------------------------------------ -----------------------------------
(PRINT OR TYPE NAME OF SIGNATORY) (PRINT OR TYPE NAME OF SIGNATORY)
- ------------------------------------ -----------------------------------
(TITLE) (TITLE)
AUGUST 15, 1996 AUGUST 15, 1996
- ------------------------------------ -----------------------------------
(EXECUTION DATE) (EXECUTION DATE)
<PAGE> 1
EXHIBIT 11.1
APPLIED DIGITAL ACCESS, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(UNAUDITED)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) ($ 3,165) ($ 1,474) ($ 5,473) $ 492
======== ======== ======== ========
Reconciliation of weighted average
number of shares outstanding to
amount used in net income
per share computation:
Weighted average number of
shares outstanding 12,175 11,854 12,033 11,780
Weighted average number of
options and warrants outstanding, -- -- -- 1,046
-------- -------- -------- --------
Weighted average number of
shares outstanding 12,175 11,854 12,033 12,826
======== ======== ======== ========
Net income (loss) per share ($ 0.26) ($ 0.12) ($ 0.45) $ 0.04
======== ======== ======== ========
</TABLE>
See Note 3 to Condensed Consolidated Financial Statements
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,359
<SECURITIES> 19,030
<RECEIVABLES> 5,922
<ALLOWANCES> (50)
<INVENTORY> 7,449
<CURRENT-ASSETS> 36,511
<PP&E> 8,840
<DEPRECIATION> (4,156)
<TOTAL-ASSETS> 47,002
<CURRENT-LIABILITIES> 5,099
<BONDS> 0
0
0
<COMMON> 50,564
<OTHER-SE> 2,426
<TOTAL-LIABILITY-AND-EQUITY> 47,002
<SALES> 0
<TOTAL-REVENUES> 18,110
<CGS> 0
<TOTAL-COSTS> 8,874
<OTHER-EXPENSES> 15,919
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,300)
<INCOME-TAX> 173
<INCOME-CONTINUING> (5,473)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,473)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
